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2006 Finance Law Changes
S Corp Income Tax Adjustments.
Session Law
Bill #
Sponsor
S.L. 2006-17
HB 1898
Representative Wilkins
AN ACT TO MAKE CORPORATE INCOME TAX ADJUSTMENTS INAPPLICABLE TO S CORPORATIONS.
OVERVIEW: This act, which was a recommendation of the Revenue Laws Study Committee, provides that an individual's pro rata share of income from an S Corporation is subject only to individual income tax adjustments, rather than being subject to both individual and corporate income tax adjustments. The act also preserves an addition to federal taxable income for a shareholder's share of the built-in gains tax paid by an S Corporation at the federal level for purposes of determining State taxable income, since North Carolina does not assess a built-in gains tax.
FISCAL IMPACT: Minimal impact.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: This act is effective for taxable years beginning on or after January 1, 2006.
ANALYSIS: The act provides that an individual's pro rata share of income from an S Corporation is subject only to individual income tax adjustments, rather than being subject to both individual and corporate income tax adjustments. Prior to this act, an individual's pro rata share of S Corporation income attributable to North Carolina was subject to corporate income tax adjustments, while S Corporation income not attributable to North Carolina was subject to individual income tax adjustments. This change, which was recommended to the Revenue Laws Study Committee by the Department of Revenue, will provide consistency in the tax treatment of S Corporations since S Corporation income flows through to its shareholders who are required to be individuals or trusts and who are taxed at the individual level as opposed to the corporate level. The change also simplifies tax form preparation. Section 3 of the act, however, preserves an addition to federal taxable income for a shareholder's share of the built-in gains tax paid by the corporation at the federal level for purposes of determining State taxable income. This add-back to federal taxable income is required under current law.
The 'built-in gains tax' in Section 1374 of the Internal Revenue Code imposes a corporate-level tax on S Corporations that dispose of assets that appreciated in value during the years when the corporation was a C Corporation. The built-in gains tax applies only to assets that are disposed of within 10 years of the date on which S Corporation status is chosen. The shareholders of the S Corporation are also taxed on the gains. To provide some measure of relief from double taxation, each shareholder's share of income from the S Corporation is reduced by the shareholder's proportionate share of the built-in gains tax paid 1
by the S Corporation.1 The built-in gains tax is designed to prevent corporations that have unrecognized gain on assets during the years the corporation is a C Corporation from converting to S status and then distributing the assets tax free.
North Carolina does not assess a built-in gains tax. Therefore, there is no double taxation at the State level and no reason to allow the deduction for the shareholder's share of the built-in gains tax. Under existing law, there is a corporate income tax provision requiring an add-back for the built-in gains tax deduction. Since this act subjects S Corporations to individual income tax adjustments only, the act modifies existing law to require an S Corporation shareholder to add to taxable income the amount by which the shareholder's share of the S Corporation's income was reduced for federal purposes by the amount of the built-in gains tax imposed on the S Corporation.
An S Corporation is a corporation that has elected to have the corporation's income pass through to the shareholders. Thus, the business profits are taxed at individual tax rates. An S Corporation election allows the shareholders to preserve the benefit of limited liability for the corporate form while at the same time being treated as partners for federal income tax purposes. The S Corporation itself does not pay any income tax, but an S Corporation is required to file an informational return with the IRS, similar to a partnership tax return, to inform the IRS of each shareholder's ownership interest in the S Corporation. To be eligible for S Corporation status, a corporation must meet all of the following requirements:
• The corporation may have no more than 75 shareholders.
• The corporation may have only one class of stock, although different voting rights among shareholders are allowed.
• All shareholders must be individuals or trusts.
• The corporation must be formed in the United States.
• No shareholder may be a non-resident alien.
• The corporation may not be an insurance company or a domestic international sales corporation.
A C Corporation, on the other hand, assumes a separate legal and tax life distinct from its shareholders. It pays taxes at its own corporate income tax rates and files its own corporate tax forms each year. C Corporations may choose to retain their profits and earnings as part of their operating capital, or they may choose to distribute some or all of their profits and earnings as dividends paid to shareholders. Dividends paid to shareholders are essentially taxed twice, once at the corporate level and again at the individual level.
As previously noted, C Corporations cannot be shareholders of an S Corporation. All S Corporation shareholders must be individuals or trusts and are taxed at the individual income tax rates.
1 IRC Section 1366(f)(2).
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IRC Update.
Session Law
Bill #
Sponsor
S.L. 2006-18
HB 1892
Rep. Wainwright; Luebke; Carney; Wilkins; (Primary Sponsors)
AN ACT TO UPDATE THE REFERENCE TO THE INTERNAL REVENUE CODE USED IN DEFINING AND DETERMINING CERTAIN STATE TAX PROVISIONS AND TO MAKE OTHER CHANGES TO MORE CLOSELY CONFORM TO FEDERAL TAX LAW.
OVERVIEW: This act, which was a recommendation of the Revenue Laws Study Committee, does the following:
• Updates the reference to the Internal Revenue Code used in defining and determining certain State tax provisions.
• Shortens the time span which a taxpayer has to file an amended estate, income, or gift tax return when the federal government corrects or otherwise determines the amount on which the tax is based.
• Conforms the filing date for income tax returns for a nonresident alien to the federal dates.
• Conforms the amounts for the credit for child care and certain employment-related expenses to the amounts allowed for the corresponding federal credits.
FISCAL IMPACT: Annual revenue loss is estimated to be $5.1 million in 2006-07 and 2007-08.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATES: The update to the reference to the Internal Revenue Code became effective when signed into law by the Governor on June 21, 2006. The part of the act concerning federal determinations became effective July 1, 2006, and applies to federal determinations made on or after that date. The parts of the act conforming the filing date for tax returns for nonresident aliens and the credit amounts for child care are effective for taxable years beginning on or after January 1, 2006.
ANALYSIS: The act makes the following changes to the revenue laws.
Federal Determinations
This act reduced the period of time in which a taxpayer must report a federal change from two years to six months. When the federal government corrects or otherwise determines the amount of an estate, gift, or income that is subject to tax, the taxpayer must file a State return that reflects that change. This is so because the State estate, gift, and income taxes are,
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to varying degrees, based on amounts determined with respect to federal law. The Multistate Tax Commission has adopted a model uniform statute for reporting federal changes. That model uniform statute requires a taxpayer to report those changes within six months. The model statute is intended to bring uniformity to this area among the states. Currently there is a great deal of variety with some states requiring changes to be reported in as little as 90 days to as much as two years. This provision became effective July 1, 2006, and applies to federal determinations made on or after that date.
Filing Period for Nonresident Aliens
Section 6072(c) of the Code requires a nonresident alien to file an income tax return on or before the fifteenth day of the sixth month following the close of the taxable year (June 15th for taxpayer whose taxable year is the calendar year). Under previous State law, nonresident alien corporate taxpayers were required to file a State return by the fifteenth day of the third month following the close of the taxable year (March 15th for a calendar year taxpayer) and nonresident alien individual taxpayers were required to file a State return by the fifteenth day of the fourth month following the close of the taxable year (April 15th for a calendar year taxpayer). Thus, under previous State law a nonresident alien was required to file a State income tax return before the federal tax return was due. This provision conforms the State filing deadlines to the federal filing deadlines for nonresident aliens and eases compliance burdens on those taxpayers. These provisions are effective for taxable years beginning on or after January 1, 2006.
Credit for Child-Care and Certain Employment-Related Expenses
Previous State law allowed a credit to a taxpayer who was eligible for the federal credit for child-care and employment-related expenses. The amount of the credit is based on a percentage of those expenses up to a certain amount. For the State credit, the amount of expenses that were taken into consideration when computing the credit were capped at $2,400 when there was one qualifying individual in the household and $4,800 when there was more than one qualifying individual in the household. Until 2003, these limits were the same as those at the federal level. In 2003, the federal limits increased to $3,000 and $6,000 respectively. This provision conforms the State limits to the federal limits. This provision also clarifies that the amount of expenses used in calculating the credit may not include any amount excluded from gross income. This provision is effective for taxable years beginning on or after January 1, 2006.
Updated References to Internal Revenue Code
North Carolina's tax law tracks many provisions of the federal Internal Revenue Code by reference to the Code.2 The General Assembly determines each year whether to update its reference to the Internal Revenue Code.3 Updating the Internal Revenue Code reference
2 North Carolina first began referencing the Internal Revenue Code in 1967, the year it changed its taxation of corporate income to a percentage of federal taxable income.
3 The North Carolina Constitution imposes an obstacle to a statute that automatically adopts any changes in federal tax law. Article V, Section 2(1) of the Constitution provides in pertinent part that the “power of taxation … shall never be surrendered, suspended, or contracted away.” Relying on this provision, the North Carolina court decisions on delegation of legislative power to administrative agencies, and an analysis of the few federal cases on this issue, the Attorney General’s Office concluded in a memorandum issued in 1977 to the Director of the Tax Research Division of the Department of Revenue that a “statute which adopts by
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makes recent amendments to the Code applicable to the State to the extent that State law tracks federal law. The General Assembly's decision whether to conform to federal changes is based on the fiscal, practical, and policy implications of the federal changes and is normally enacted in the following year, rather than in the same year the federal changes are made. This act changes the reference date from January 1, 2005, to January 1, 2006.
Between January 1, 2005, and January 1, 2006, there were four major pieces of federal legislation that made changes to the Internal Revenue Code. This federal legislation includes the Energy Tax Incentive Act of 2005 (P.L. 109-58) signed into law on August 8, 2005, the Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005 (P.L. 109-59) signed into law on August 10, 2005, the Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73) signed into law on September 23, 2005, and the Gulf Opportunity Zone Act of 2005 (P.L. 109-135) signed into law on December 21, 2005.
• Energy Tax Incentive Act of 2005 (P.L. 109-58) (hereinafter Energy Act): Many of the changes made in this act involve tax credits for various activities. Because they are tax credits, these provisions do not have a direct impact at the State level. There are, however, several provisions that could have an impact at the State level, most of which involve the depreciation, amortization, or expensing of certain items.
o Elimination of deduction for clean-fuel vehicles. Under previous law, a taxpayer was allowed a deduction for the purchase of a qualified clean-fuel vehicle. A 'qualified clean-fuel vehicle' is any motor vehicle that may be propelled by a clean-burning fuel such as natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, electricity, or any other fuel at least 85% of which is methanol, ethanol, or other alcohol or ether. The maximum amount of the deduction varied depending on the type of vehicle purchased. The deduction began to be phased out in 2004, and was set to be eliminated after the 2006 taxable year. This act moves up the phase-out so that the deduction is eliminated after the 2005 taxable year. In place of the deduction, this act creates a new federal credit for alternative fuel motor vehicles.
o Tax deferral for gains on electric transmission assets. Under previous law, a taxpayer could elect to recognize qualified gain from a qualifying electric transmission transaction over an eight-year period. In order for a transaction to be a 'qualifying electric transmission transaction', numerous conditions had to be satisfied, one of which was that the transaction must have been completed before January 1, 2007. This act extends that date by one year to January 1, 2008.
o Deduction for nuclear decommissioning costs. Utilities that own or operate a nuclear power plant are required by law to decommission the plant at the end of its useful life. A utility may elect to deduct contributions it makes to a nuclear decommissioning reserve fund established to help pay the costs associated with the eventual decommissioning. For previous tax years, contributions to such a reserve fund were limited to the lesser of the amount of nuclear
reference future amendments to the Internal Revenue Code would … be invalidated as an unconstitutional delegation of legislative power.”
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decommission costs allocable to the fund that is included in the taxpayer's cost of services for ratemaking purposes for the taxable year and the ruling amount. The 'ruling amount' is a schedule obtained from the IRS that specifies the annual payments that must be made into the fund to cover the amount of the decommission costs allocable to the fund over its existence. This act eliminates the 'lesser of' test for taxable years beginning on or after January 1, 2006, and instead limits the deduction to the ruling amount.
o Energy efficient commercial buildings property deduction. Despite the fact that large commercial buildings use approximately one-fourth of the electrical energy consumed in the nation, there was previously no federal tax incentive to encourage the use of energy-efficient property in the construction or renovation of commercial buildings. This act allows taxpayers to claim a deduction (as opposed to depreciation or amortization) with respect to costs associated with energy-efficient commercial building property placed into service between January 1, 2006, and January 1, 2008. The maximum amount that may be deducted is $1.80 per square foot of the building, less any amount deducted under this provision with respect to the same building in previous tax years. In order to qualify for the deduction, the following conditions must be satisfied: 1) the costs must be associated with depreciable or amortizable property that is installed in a commercial building that meets certain standards for energy efficiency; 2) the property is installed as part of the interior lighting, heating, cooling, ventilation, or hot water systems or the building envelope; and 3) the property is installed as part of a plan to reduce the total annual energy costs of the building with respect to the interior lighting, heating, cooling, ventilation, and hot water systems by at least 50% as compared to a similar building that meets certain minimum standards for energy efficiency. The IRS is required to issue regulations relating to eligibility for a partial deduction and to the transfer of a deduction from a public entity (like the State) to the person responsible for designing the property.
o Recapture of section 197 amortization. Generally, property subject to amortization under section 197 of the Code is intangible property that is purchased and held by a taxpayer in the course of a business. Section 197 property includes goodwill, covenants not to compete, patents, copyrights, trademarks and certain licenses. The cost of section 197 property is recoverable over fifteen years using straight-line depreciation. Under general rules, gain on the sale of depreciable property must be recaptured as ordinary income to the extent of depreciation deductions previously claimed. Under general rules, the recapture amount is computed separately for each piece of property. This act provides that if multiple pieces of section 197 property are sold or disposed of in a single transaction or series of transactions, then the taxpayer must compute the recapture as if all of the property were a single asset. The effect of this change is to maximize the amount of income treated as recapture, and thus as ordinary income, and to lessen the amount treated as a capital gain, which is taxed at a lower rate.
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o Depreciation of electric transmission property. Generally, under the modified accelerated cost recovery system (MACRS), assets used in the transmission and distribution of electricity for sale have a 20-year recovery period. This act allows the costs of certain electric transmission property placed into service after April 11, 2005, to be recovered over 15 years instead of 20.
o Expensing liquid fuel refineries. Under previous law, petroleum refining assets were depreciated over a 10-year recovery period using the double declining balance method. Petroleum refining assets are assets used for distillation, fractionation, and catalytic cracking of crude petroleum into gasoline and other petroleum products. This acts allows a taxpayer to make an election to expense 50% of the cost of qualified refinery property in the year in which the property is placed into service. 'Qualified refinery property' includes any portion of a qualified refinery that satisfies the following conditions: 1) The original use of the property commences with the taxpayer; 2) The property is placed in service between August 8, 2005, and January 1, 2012; 3) The property satisfies certain production capacity requirements; 4) The property satisfies all applicable environmental laws in effect when it is placed into service; 5) No written binding contract for the construction of the property was in effect on or before June 14, 2005; and 6) The construction of the property is subject to a written binding contract entered into before January 1, 2008. A 'qualified refinery' is one that is located in the United States and that is designed to serve the primary purpose of processing liquid fuel from crude oil or qualified fuels (including shale and tar sands and coal seams). The expensing election is not available with respect to a refinery that is used primarily as a topping plant, asphalt plant, lube oil facility, crude or product terminal, or blending facility.
o Depreciation of natural gas distribution lines. Under previous law, natural gas distribution lines installed by a gas company were depreciated over a 20-year period. This act allows natural gas depreciation lines placed in service between April 11, 2005, and January 1, 2011, to be depreciated over a 15-year period.
o Depreciation of natural gas gathering pipelines. Prior to the enactment of this act, there was a disagreement among the courts as to what asset class natural gas gathering pipelines owned by a nonproducer belonged. The IRS maintained, and this position was supported by the Tax Court, that these pipelines belonged to an asset class subject to depreciation over 15 years. The Courts of Appeals in the Sixth, Eighth, and Tenth Circuits, however, held that these pipelines belonged to an asset class subject to depreciation over seven years. There was agreement that natural gas gathering pipelines owned by a producer were part of the asset class subject to depreciation over seven years. This act clarifies that all natural gas gathering pipelines, regardless of ownership, are subject to depreciation over seven years. This provision applies to natural gas gathering pipelines placed in service after April 11, 2005.
o Geological and geophysical costs amortized over two years. Geological and geophysical costs are those incurred for the purpose of accumulating data that serves as 7
the basis for the decision about acquisition or retention of mineral rights by taxpayers in the business of exploring for minerals (including gas and oil). Courts have held these costs to be capital in nature and allocable to the property acquired or retained. If no property was acquired or retained, the costs were treated as a capital loss. This act provides that these costs, when incurred in the United States for oil or gas exploration, shall be amortized ratably over a 24-month period beginning on the mid-point of the taxable year in which the costs were incurred. The act does not affect the treatment of costs incurred outside of the United States or with respect to exploration for minerals other than oil or gas.
o 84-month amortization of air pollution control facilities. Previous law allowed taxpayers to amortize over a 60-month period a certified pollution control facility used in connection with a plant that was in operation before January 1, 1976. For certified pollution control facilities placed in service after April 11, 2005, this act eliminates the requirement that the property be used in connection with a plant that was in operation before 1976 if the plant is an electric generation plant that is primarily coal fired. For property that satisfies this criteria, the amortization period is 84 months. The act does not lengthen the amortization period for property that was covered by previous law, it provides a favored, though not as generously favored, method of depreciation for another class of property.
• Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005 (P.L. 109-59) (hereinafter SAFE Act): Although this act makes numerous tax changes at the federal level, these changes have little to no direct impact at the State level.
• Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73) (hereinafter Katrina Act): 2005 was a record-setting year on the meteorological front. Not only did the year see a record number of named storms (27) and a record number of hurricanes (14), the year also included the costliest Atlantic hurricane on record and one of the deadliest, Hurricane Katrina. Hurricane Katrina made landfall along the Gulf Coast on August 29, 2005, as a Category 3 storm. Hurricane Katrina resulted in the deaths of more than 1,400 people and caused over $80 billion in property damage. In the aftermath of Hurricane Katrina, Congress took action to assist taxpayers in the affected region. On September 21, 2005, Congress passed the Katrina Emergency Tax Relief Act of 2005, which was signed into law by President Bush on September 23, 2005. The act is a collection of tax relief provisions for individuals and businesses. Below, the key provisions of this act that could have an impact on State revenues are summarized.
o General Provisions. The act contains definitions of several key phrases that are used throughout the act. Under the act, 'Hurricane Katrina disaster area' means an area with respect to which a major disaster has been declared by the President before September 14, 2005, with respect to Hurricane Katrina. The states of Alabama, Florida, Louisiana, and Mississippi comprise the Hurricane Katrina disaster area. The act also defines the term 'core disaster area.' The core disaster area is a subset of the Hurricane Katrina disaster area that has been determined by the President to warrant individual or individual 8
and public assistance from the federal government. The core disaster area covers certain counties and parishes in Alabama, Louisiana, and Mississippi.
o Retirement Funds. The act contains a number of special rules related to retirement funds for people who lived in the Hurricane Katrina disaster area or the core disaster area. Generally, these provisions allow for a more liberal use of retirement funds for emergency needs than would otherwise be allowed without subjecting the taxpayer to some sort of penalty or disincentive. These provisions include the following:
􀂾􋹔 Tax favored withdrawals from retirement plans for relief relating to Hurricane Katrina. Generally, a withdrawal from a qualified retirement plan, a tax-sheltered annuity, an IRA, or an eligible deferred compensation plan maintained by a state or local government is included in taxable income in the year in which it is made. In addition, a distribution that is received before death, disability, or the age of 59 ½ is generally subject to a 10% early withdrawal tax. Some distributions are known as eligible rollover distributions and are not included in taxable income or subject to the 10% penalty tax. These distributions must be rolled over into another qualified retirement account within 60 days. This act provides an exception to the 10% early withdrawal tax in the case of a qualified Hurricane Katrina distribution4 from a qualified retirement plan, tax-sheltered annuity, or IRA. In addition, any amount required to be included in income as a result of a qualified Hurricane Katrina distribution is included in income in installments over the three-year period beginning with the year in which the distribution is made rather than entirely within the year that the distribution is made. Finally, any amount of a qualified Hurricane Katrina distribution that is recontributed to an eligible retirement account within the three-year period is treated as a roll-over distribution and is not included in income.
􀂾􋹒 Recontribution of withdrawals for home purchases cancelled due to Hurricane Katrina. There is an exception to the 10% early withdrawal tax discussed above in the case of a qualified first-time homebuyer distribution from an eligible retirement account. A qualified first-time homebuyer distribution is one that does not exceed $10,000 and that is used within 120 days of the distribution for the purchase or construction of a principal residence of a first-time homebuyer. If the distribution is not used for the purchase of the home within 120 days or is not rolled over into an eligible retirement account within 60 days, the distribution is included in income and is subject to the 10% early withdrawal tax. This act allows a taxpayer who received a qualified distribution from a retirement account to recontribute that amount to an eligible retirement account without penalty. For the purposes of this provision, a 'qualified distribution' is a
4 A 'qualified Hurricane Katrina distribution' is a distribution made from an eligible retirement plan on or after August 25, 2005, and before January 1, 2007, to an individual whose primary place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss due to Hurricane Katrina. The total amount of qualified Hurricane Katrina distributions to a taxpayer from all accounts may not exceed $100,000.
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distribution that was received after February 28, 2005, and before August 29, 2005, and that was to be used to purchase or construct a principal residence in the Hurricane Katrina disaster area, but the residence is not purchased or constructed because of Hurricane Katrina. Any portion of a qualified distribution may be contributed to an eligible retirement account and treated as a roll-over if it is recontributed between August 25, 2005, and February 28, 2006. Because it is treated as a roll-over, that portion will not be included in income or subject to the 10% early withdrawal tax.
􀂾􋹌 Loans from qualified plans for relief relating to Hurricane Katrina. An individual is allowed to borrow from a qualified employer plan in which the individual participates provided the loan satisfies certain conditions. Generally, a loan from a qualified employer plan is treated as a taxable distribution of plan benefits. A loan is not treated as a tax distribution of benefits to the extent that the loan, when added to the outstanding balance of all other loans to the individual from all plans maintained by the employer, does not exceed the lesser of 1) $50,000 reduced by the excess of the highest outstanding balance of loans from such plans during the one-year period ending on the day before the date the loan is made over the outstanding balance of loans from the plan on the date the loan is made or 2) the greater of $10,000 or one half the individual's accrued benefit under the plan. For this exception to apply, the loan must have a repayment period of five years or less, must be amortized in level payments, and must have payments due at least quarterly. This act provides special rules in the case of a loan from a qualified plan to a qualified individual. For the purposes of this provision, a 'qualified individual' is one whose principal place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss because of Hurricane Katrina. Under this provision, the loan limit discussed above is increased to the lesser of 1) $100,000 reduced by the excess of the highest outstanding balance of loans from such plans during the one-year period ending on the day before the date the loan is made over the outstanding balance of loans from the plan on the date the loan is made or 2) the greater of $10,000 or the individual's accrued benefit under the plan. In addition, this act provides that in the case of a qualified individual with an outstanding loan from a qualified plan on or after August 25, 2005, if the due date for any repayment with respect to the loan occurs during the period from August 25, 2005, to December 31, 2006, the due date is delayed for one year.
o Charitable Giving Incentives. In the wake of Hurricane Katrina, people from around the nation rushed to the aid of people in the affected areas with unprecedented amounts of charitable giving. As part of this act, Congress further encouraged and rewarded charitable giving.
􀂾􋹔 Temporary suspension of limitations on charitable contributions. In general, the income tax deduction allowed for charitable contributions is subject to limitations based on the type of taxpayer, the property contributed, and 10
the donee organization. Subject to certain limitations, discussed further below, the following general rules apply: 1) Contributions of cash are deductible in the amount contributed; 2) Contributions of capital gain property5 to a qualified charity are deductible at fair market value; 3) Contributions of other appreciated property are deductible at the donor's basis in the property; and 4) Contributions of depreciated property are deductible at the fair market value of the property. Most contributions are subject to percentage limitations. For individuals, the amount deductible is limited to a percentage of the taxpayer's contribution base6 The percentage varies depending on the type of donee organization and the type of property contributed. Contributions by an individual of property other than appreciated capital gain property to a charitable organization described in section 170(b)(1)(A) of the Code (public charities, private foundations other than private non-operating foundations, and certain governmental units) are deductible up to 50% of the contribution base. Contributions of this type of property to nonoperating private foundations and certain other organizations are deductible up to 30% of the contribution base. Contributions of appreciated capital gain property to an organization described in section 170(b)(1)(A) of the Code are generally deductible up to 30% of the contribution base. A taxpayer may elect to bring all of these contributions of appreciated capital gain property under the 50% limitation by reducing the amount of the deduction by the amount of the appreciation of the property. Contributions of appreciated capital gains property to a private nonoperating foundation are deductible up to 20% of the contribution base. For corporations, charitable contributions are deductible up to 10% of the corporations taxable income computed without regard to net operating loss or capital loss carrybacks. For both individuals and corporations, excess charitable contributions may be carried forward for up to five years. There is also an overall limitation on most itemized deductions for individuals. The total amount of otherwise allowable itemized deductions is reduced by three percent of the amount of the taxpayer's adjusted gross income in excess of a certain threshold. However, the otherwise allowed deductions may not be reduced by more than 80%. This reduction is reduced to two percent for the 2006 and 2007 taxable years and to one percent for the 2008 and 2009 taxable years, is repealed for the 2010 taxable year, and is reinstated for the 2011 taxable year. This act provides several exceptions to the limitations on charitable contribution deductions. For individuals, the deduction for qualified contributions is allowed up to the amount by which the taxpayer's contribution base exceeds the taxpayer's deductions for other charitable contributions. In most cases, this means that an individual may
5 'Capital gain property' means any capital asset or property used in the taxpayer's trade or business the sale which at its fair market value, at the time of contribution, would have resulted in a gain that would have been a long-term capital gain.
6 The 'contribution base' is the taxpayer's adjusted gross income computed without regard to any net operating loss carryback.
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deduct charitable contributions up to 100% of the taxpayer's adjusted gross income computed without regard to any net operating loss carryback. For corporations, the deduction for a qualified contribution is allowed up to the amount by which the corporation's taxable income exceeds the deduction for other charitable contributions. For the purposes of these provisions, a 'qualified contribution' is a cash contribution that is made between August 28, 2005, and December 31, 2005, to an organization described in section 170(b)(1)(A) of the Code. The term does not include a contribution of noncash property or one that is for the establishment or maintenance of a segregated fund or account with respect to which the donor reasonably expects to have advisory privileges with respect to the fund or account because of his status as donor. In the case of a corporation, the contribution must be for relief efforts related to Hurricane Katrina in order to be a qualified contribution. In addition, for individuals the charitable deduction contribution, up to the amount of qualified contributions, is not treated as an itemized deduction and is not subject to the reduction for higher-income taxpayers.
􀂾􋹁 Additional exemption for housing Hurricane Katrina displaced individuals. In the aftermath of Hurricane Katrina, hundreds of thousands of residents of the affected areas were displaced. During this time of displacement, many individuals opened their homes to those who had been displaced. Generally, individuals are allowed personal exemptions in computing taxable income. Personal exemptions are allowed for the taxpayer, the taxpayer's spouse, and the taxpayer's dependents. Personal exemptions are phased out for higher-income taxpayers. This act allowed a taxpayer an additional $500 exemption for each Hurricane Katrina displaced individual of the taxpayer, up to a maximum additional exemption of $2,000. The additional exemption is not subject to the phase out for higher-income taxpayers. For the purposes of this provision, a 'Hurricane Katrina displaced individual' is a person 1) whose principal place of abode on August 28, 2005, was in the Hurricane Katrina disaster area, 2) who was displaced from the abode, 3) who is provided housing free of charge in the taxpayer's principal place of residence for a period of 60 consecutive days that ends in the taxable year in which the exemption is claimed, and 4) who is not the spouse or dependent of the taxpayer. For a person whose principal place of abode on August 28, 2005, was outside of the core disaster area, the person's abode must have been damaged by Hurricane Katrina or the person must have been evacuated from the abode by reason of Hurricane Katrina.
􀂾􋹉 Increase in standard mileage rate for charitable use of vehicles. In determining the amount of the charitable contribution deduction when a taxpayer operates a vehicle in providing donated services to a charity, the taxpayer may either deduct actual operating expenditures or use the charitable standard mileage rate. The charitable standard mileage rate, 14 cents per
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mile, is significantly less than the business standard mileage rate7 The charitable rate is less than the business rate because it is meant to offset direct operating expenses only, such as gas, and not other expenses, such as a depreciation, insurance, or general maintenance. This act allows a taxpayer who uses a vehicle in providing donated service to charity for Hurricane Katrina relief only to compute the charitable mileage deduction at a rate equal to 70% of the business standard mileage rate, rounded to the next highest cent, on the date of the contribution. In the alternative, the taxpayer may continue to use actual operating expenditures to determine the amount of the deduction.
􀂾􋹍 Mileage reimbursement to charitable volunteers excluded from gross income. Volunteer drivers who are reimbursed for mileage expenses have taxable income to the extent that the reimbursement exceeds deductible expenses computed using either direct expenses or the charitable standard mileage rate. Under this act, reimbursement for mileage expenses by a charitable organization described in section 170(c) of the Code to a volunteer for the costs of using a passenger vehicle for Hurricane Katrina relief only is not included in income to the extent that the reimbursement does not exceed the amount that would be allowed using the business standard mileage rate. A taxpayer may not claim a deduction or credit for amounts excluded under this provision.
􀂾􋹃 Charitable deduction for contribution of food inventories. A taxpayer's deduction for charitable contributions of inventory is generally limited to the lesser of the taxpayer's basis in the inventory (usually cost) or the fair market value of the inventory. For certain contributions of inventory, a C corporation may claim an enhanced deduction equal to the lesser of 1) basis plus one-half of the item's appreciation or 2) two times basis. To be eligible for the enhanced deduction, the contributed property must generally be inventory of the corporation, contributed to a charitable organization described in section 501(c)(3) of the Code, and the donee must 1) use the property consistent with the donee's exempt purpose only for the care of the ill, the needy, or infants, 2) not transfer the property in exchange for money, other property, or services, and 3) provide the taxpayer with a written statement attesting to the proper use of the property. This act allows the enhanced deduction to any taxpayer engaged in a trade or business that makes a donation of food inventory. For taxpayers other than C corporations, the total deduction for contributions of food inventory may not exceed 10% of the taxpayer's income from all business entities from which a contribution of food inventory is made. The enhanced deduction is available only for food that qualifies as 'apparently wholesome food,' – food intended for human consumption that meets all quality and labeling standards imposed by
7 For expenses incurred between January 1, 2005, and September 1, 2005, the standard business mileage rate was 40.5 cents per mile. For expenses incurred between September 1, 2005, and January 1, 2006, the standard business mileage rate was 48.5 cents per mile.
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federal, state, and local laws even though the food may not be readily marketable for any number of reasons.
􀂾􋹃 Charitable deduction for contribution of book inventories. As with contributions of food inventories above, this act extends the enhanced deduction for C corporations to qualified book contributions. A 'qualified book contribution' is a charitable contribution of books to a public school that provides elementary education or secondary education, that is an educational organization that normally maintains a regular faculty and curriculum, and that normally has a regularly enrolled body of pupils in attendance at the place where its education activities are regularly conducted.
o Miscellaneous Provisions.
􀂾􋹅 Exclusion for certain cancellations of indebtedness by reason of Hurricane Katrina. Gross income includes income that is realized by a debtor for the discharge of indebtedness, subject to certain exceptions. This act provides that the gross income of a qualified individual does not include any amount which would otherwise by includible in gross income by reason of a discharge of nonbusiness debt if the indebtedness is discharged by an applicable entity. The relief allowed under this provision does not apply to any indebtedness to the extent that real property outside of the Hurricane Katrina disaster area serves as security for the debts. For the purposes of this provision, a 'qualified individual' is any natural person whose principal place of abode on August 25, 2005, was located 1) in the core disaster area or 2) in the Hurricane Katrina disaster area and the person suffered economic loss as a result of Hurricane Katrina. An 'applicable entity' includes the following: a financial institution; a credit union; a corporation that is a direct or indirect subsidiary of a financial institution or credit union and as such is subject to regulation by federal or state agencies; the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the National Credit Union Administration, and certain other federal executive agencies; an executive, judicial, or legislative agency; and any other organization for whom the lending of money is a significant trade or business.
􀂾􋹓 Suspension of certain limitations on personal casualty losses. A taxpayer may generally claim a deduction for any loss sustained during the taxable year for which he is not compensated by insurance or otherwise. For individuals, the loss must be incurred in a trade or business or consist of property loss attributable to casualty or theft. Losses are deductible only if they exceed $100 per casualty or theft and total casualty and theft losses exceed 10% of the taxpayer's adjusted gross income. This act removes the $100 and 10% limitations on casualty and theft losses to the extent those losses are in the Hurricane Katrina disaster area on or after August 25, 2005, and are attributable to Hurricane Katrina.
􀂾􋹒 Required exercise of IRS administrative authority. In general, the Secretary of the Treasury may grant reasonable extensions of time to taxpayers to
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perform certain acts. In addition, for certain military personnel, the time period for performing certain acts (such as filing returns, paying taxes, bringing suit) is automatically suspended. In the case of a Presidentially declared disaster or terroristic or military action, the Secretary has the authority to prescribe a period of up to one year in which the time period for the same actions is suspended. This act requires the Secretary to suspend those time periods at least until February 28, 2006, for taxpayers determined to have been affected by the Presidentially declared disaster relating to Hurricane Katrina. In addition, this act adds employment and excise taxes to the list of taxes for which the Secretary may extend filing and payment time periods.
􀂾􋹓 Special rules for mortgage revenue bonds. A qualified mortgage bond is a type of private activity bond for which interest is excluded from gross income. Qualified mortgage bonds are issued to make mortgage loans to qualified mortgagors for the purchase, improvement, or rehabilitation of owner-occupied residences and to finance qualified home improvement loans. There are several limitations on qualified mortgage bonds, including income limitations for homebuyers, purchase price limitations, and the requirement that the mortgagor be a 'first-time homebuyer' ��� one that did not have any ownership interest in a primary residence for the previous three years. The first-time home buyer requirement does not apply to targeted area residences – one that is located in an area of chronic economic distress or a census tract in which at least 70% of the families have an income that is 80% or less of the statewide median income. A qualified home improvement loan may not exceed $15,000. This act eliminates the first-time homebuyer requirement with respect to qualified Hurricane Katrina recovery residences. A 'qualified Hurricane Katrina recovery residence' is one that is financed before January 1, 2008, and is either 1) located in the core disaster area or 2) the mortgagor of which owned a principal residence in the Hurricane Katrina disaster area that was rendered uninhabitable by Hurricane Katrina and the residence financed is in the same state as the previous residence. The act also increases the maximum amount of a qualified home improvement loan to $150,000 for residences located in the Hurricane Katrina disaster area to the extent that the loan is for repair of damage caused by Hurricane Katrina.
􀂾􋹅 Extension of replacement period for nonrecognition of gain. A taxpayer generally realizes gain to the extent the sales price of property exceeds the taxpayer's basis in the property. The realized gain is subject to taxation unless it is deferred or not recognized under some special provision. Gain realized by a taxpayer from an involuntary conversion of property is deferred to the extent the taxpayer replaces the property within the applicable period. The applicable period begins when property is converted and ends two years after the close of the first taxable year in which the gain is realized. This act extends the applicable period from two years to five years for property that is located within the Hurricane Katrina disaster area that is compulsorily or involuntarily converted after 15
August 25, 2005, by reason of Hurricane Katrina. Substantially all of the use of the replacement property must be in this area for this provision to apply.
􀂾􋹓 Secretarial authority to make adjustments regarding taxpayer and dependency status for taxpayers affected by Hurricane Katrina. This provision allows the Secretary of the Treasury to make adjustments to the tax laws to ensure that taxpayers do not lose eligibility for credits or deductions or experience a change in filing status due to temporary relocations caused by Hurricane Katrina. An example of such an adjustment would be allowing a parent to claim a personal exemption for a child even if the child did not satisfy the residency requirement as a result of a relocation due to Hurricane Katrina. Any adjustment must ensure that an individual is not taken into account by more than one taxpayer with respect to the same benefit.
• Gulf Opportunity Zone Act of 2005 (P.L. 109-135) (GO Act): The Gulf Opportunity Zone Act of 2005 expanded upon the relief offered in the Katrina Emergency Tax Relief Act of 2005. In some instances, this expansion meant extending the additional benefits allowed under the Katrina Act to taxpayers affected by Hurricanes Rita or Wilma. In other cases, the expansion created new tax benefits for taxpayers in one or more of the disaster areas. The act also made numerous technical corrections.
o General Provisions. First, the GO Zone Act added several new definitions. First, the 'Gulf Opportunity Zone' or 'GO Zone' is a subset of the Hurricane Katrina disaster area that has been determined by the President to warrant individual or individual and public assistance from the federal government and is the same as the 'core disaster area' under the Katrina Act. The 'Hurricane Rita disaster area' means an area with respect to which the President has declared a major disaster before October 6, 2005, with respect to Hurricane Rita. The 'Hurricane Wilma disaster area' means an area with respect to which the President has declared a major disaster before November 14, 2005, with respect to Hurricane Wilma. The 'Rita GO Zone' and 'Wilma GO Zone' are, respectively, the portions of the Hurricane Rita disaster area and Hurricane Wilma disaster area that have been determined by the President to warrant individual or individual and public assistance from the federal government.
o Extensions of Hurricane Katrina benefits. The GO Zone Act extended some of the benefits of the Katrina Act to areas affected by Hurricanes Rita and Wilma. The following changes fall into this category.
􀂾􋹒 Retirement plans. The specific provisions discussed under the Katrina Act were repealed and replaced with more general provisions relating to all of the hurricanes. The provisions under this act were substantively identical to those discussed under the Katrina Act with some timing differences related to the different dates of the three storms.
􀂾􋹃 Casualty losses. The specific provisions discussed under the Katrina Act were repealed and replaced with more general provisions relating to all of the hurricanes. The provisions under this act were substantively identical 16
to that discussed under the Katrina Act with some timing differences related to the different dates of the three storms.
􀂾􋹓 Secretarial authority to make adjustments. The specific provisions discussed under the Katrina Act were repealed and replaced with more general provisions relating to all of the hurricanes. The provisions under this act were substantively identical to those discussed under the Katrina Act with some timing differences related to the different dates of the three storms.
􀂾􋹍 Mortgage revenue bonds. The first-time homebuyer requirement is eliminated for residences in the Rita GO Zone or the Wilma GO Zone. In addition, the increased maximum amount of a qualified home improvement loan is applied to residences in the Rita GO Zone and the Wilma GO Zone.
o Housing relief for Hurricane Katrina. As discussed above, the Katrina Act provided some relief to individuals who provided housing for Hurricane Katrina evacuees. In this act, Congress provided further tax relief relating to housing expenditures. Employer-provided housing is generally included in income as a form of compensation. An exception to this general rule exists when an employee is required to accept the lodging on business premises as a condition of employment. This act provides that a qualified employee's gross income does not include the value of any in-kind lodging furnished to the employee, the employee's spouse, or the employee's dependents by or on behalf of the qualified employer. The exclusion applies only to lodging furnished during the six-month period beginning January 1, 2006, and may not exceed $600 for any month in which lodging is furnished. For the purposes of this provision, a 'qualified employee' is an individual who on August 28, 2005, had a principal residence in the GO Zone and who performs substantially all of his or her employment services in the GO Zone for a qualified employer. For the purposes of this provision, a 'qualified employer' is an employer with a trade or business located in the GO Zone.
o Depreciation and expensing.
􀂾􋹂 Bonus depreciation for Gulf Opportunity Zone property. In 2002 and 2003, Congress acted to allow for bonus depreciation (either 30% or 50% depending on when the property was purchased) for property that was purchased after September 10, 2001. In order to qualify for the bonus depreciation, the property had to have been placed into service before January 1, 2005. For certain transportation property, noncommercial aircraft, or property with a long production period, the property must have been placed into service before January 1, 2006. This act allows a taxpayer to claim an additional first-year depreciation allowance equal to 50% of the adjusted basis of qualified Gulf Opportunity Zone property acquired on or after August 25, 2005, and placed into service before January 1, 2008 (the sunset date is January 1, 2009, for nonresidential real property and residential rental property). 'Qualified Gulf Opportunity Zone' property must satisfy all of the following conditions: 1) It must be depreciable modified accelerated cost recovery systems (MACRS)
17
recovery property with a recovery period of 20 years or less, MACRS water utility property, qualified leasehold improvement property, off-the-shelf computer software, residential rental property, or nonresidential real property; 2) Substantially all use of the property must be in the active conduct of a trade or business of the taxpayer in the GO Zone; 3) The original use of the property in the GO Zone must commence with the taxpayer on or after August 25, 2005; 4) The property must be purchased on or after August 25, 2005; 5) No written binding contract for the purchase of the property may be in effect before August 25, 2005; and 6) The property must be placed in service before January 1, 2008 (January 1, 2009 for nonresidential real property and residential rental property). The term does not include property that is 1) mandatory alternative depreciation system (ADS) property; 2) tax-exempt bond-financed property; 3) qualified revitalization buildings or rehabilitation expenditures for which a deduction under section 1400I of the Code is claimed; or 4) property used in connection with a private or commercial golf course, a country club, a massage parlor, a hot tub facility, a suntan facility, a liquor store, or a gambling or animal racing property. In addition, this act allows the Secretary to extend the placed-in-service date for noncommercial aircraft and property with longer production periods for up to one year. This extension is granted on a case-by-case basis and may only be granted if the delay in placing the property into service was caused by one of the three hurricanes and the property is placed in service in the GO Zone, the Rita GO Zone, or the Wilma GO Zone.
􀂾􋹉 Increase in limits on section 179 deductions. Certain taxpayers may elect to claim a section 179 expense deduction on the cost of qualifying property rather than depreciating the property over time. For the 2003 through 2007 tax years, the maximum amount of the deduction is limited to $100,000, indexed for inflation.8 This limitation is increased by $35,000 for property that is placed in service in the New York Liberty Zone, an empowerment zone, or a renewal community. The amount of the section 179 deduction is reduced to the extent that the total amount of property placed into service exceeds an investment threshold, currently set at $400,000, indexed for inflation.9 The section 179 deduction may not exceed a taxpayer's taxable income from the active conduct of a trade or business. This act increases the maximum section 179 deduction for qualified GO Zone property by the lesser of $100,000 or the amount of property placed into service in the GO Zone. In addition it increases the total investment limitation by the lesser of $600,000 or the amount of property placed into service in the GO Zone. The increased amounts apply to property acquired on or after August 25, 2005, and placed into service before January 1, 2008. 'Qualified GO Zone property' must satisfy all of the following conditions: 1) It must be depreciable modified
8 The adjusted dollar limitation is $105,000 for 2005 and $108,000 for 2006.
9 The adjusted investment limitation is $420,000 for 2005 and $430,000 for 2006.
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accelerated cost recovery systems (MACRS) recovery property with a recovery period of 20 years or less; 2) Substantially all use of the property must be in the active conduct of a trade or business of the taxpayer in the GO Zone; 3) The original use of the property in the GO Zone must commence with the taxpayer on or after August 25, 2005; 4) The property must be purchased on or after August 25, 2005; 5) No written binding contract for the purchase of the property may be in effect before August 25, 2005; and 6) The property must be placed in service before January 1, 2008. The term does not include property used in connection with a private or commercial golf course, a country club, a massage parlor, a hot tub facility, a suntan facility, a liquor store, or a gambling or animal racing property.
􀂾􋹄 Deduction for demolition and clean-up costs. Under general law, demolition costs are capitalized and added to the basis of the land on which the demolished building was located. The tax treatment of debris removal costs depends on the nature of the costs incurred. Debris removal costs that are in the nature of replacement must be capitalized and added to the basis of the property damaged. Other times, debris removal costs may be used to show a decrease in the fair market value of property which could be used to determine the amount of a casualty loss. This act allows a taxpayer to claim a current deduction for 50% of any qualified Gulf Opportunity Zone clean-up costs paid between August 25, 2005, and January 1, 2008. For the purposes of this provision, a 'qualified Gulf Opportunity Zone clean-up cost' is an amount paid for the removal of debris, or the demolition of structures, on real property located in the GO Zone if the real property is either held by the taxpayer for use in a trade or business or is inventory in the hands of the taxpayer.
􀂾􋹅 Environmental remediation costs. Under previous law, a taxpayer may elect to deduct, rather than capitalize, certain environmental remediation expenditures incurred in connection with property used in a trade or business for the production of income. This provision expired for expenditures incurred after December 31, 2005. This act extends the expiration date for that provision until December 31, 2007, for qualified environmental remediation expenditures incurred in connection with a qualified site in the GO Zone. In addition, expenditures incurred on or after August 25, 2005, with respect to petroleum products in the GO Zone are included in the deduction.
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Amend Taxation of Logging Machinery.
Session Law
Bill #
Sponsor
S.L. 2006-19
HB 1938
Rep. Wainwright; Church; McComas; Underhill; (Primary Sponsors)
AN ACT TO TREAT COMMERCIAL LOGGING MACHINERY THE SAME AS FARM MACHINERY UNDER THE SALES TAX.
OVERVIEW: This act, which was a recommendation of the Revenue Laws Study Committee, exempts from the 1% privilege tax, with an $80 maximum tax per article, commercial logging machinery, attachments, repair parts for commercial logging machinery, lubricants applied to commercial logging machinery, and fuel to operate commercial logging machinery for use in commercial logging operations.
FISCAL IMPACT: Annual revenue loss is estimated to be $2.87 million.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: This act became effective when signed into law by the Governor on June 21, 2006, and applies to purchases made on or after July 1, 2006.
ANALYSIS: For years, State tax law has provided that the sales and use tax rate on mill machinery is 1%, with an $80 maximum tax per article. There has never been a specific reference in the sales tax statutes to machinery used in the forestry and logging business; however, based on a long-standing interpretation by the Department of Revenue, logging firms that had contracts with wood product manufacturers to cut timber were deemed entitled to the 1% rate, $80 cap based on the preferential rate afforded to manufacturing industries and plants.
For several years, North Carolina has worked toward simplifying its sales and use tax statutes in an effort to conform to the Streamlined Sales and Use Tax Agreement. One of the conforming changes the State had to make was to simplify its sales tax rates. Under the Streamlined Sales and Use Tax Agreement, a state must have one rate, with no caps or thresholds, as of January 2006.
Prior to January 1, 2006, North Carolina had several different rates, including this 1% rate with an $80 cap. To conform to the Streamlined Sales and Use Tax Agreement, the General Assembly changed how the State taxes items previously taxed at the 1% sales tax rate with an $80 cap:
• In 2001, at the request of North Carolina Citizens for Business and Industry, the General Assembly maintained the preferential tax rate on mill machinery by removing it from the sales tax statutes to the privilege tax statutes. By changing the nature of the tax from a sales tax to a privilege tax, the industry kept its preferential rate and the State conformed to the Streamlined Sales and Use Tax Agreement. The change from a sales tax to a privilege tax means that retailers are not responsible for collecting and remitting the tax. The change in the law, made in 2001, became effective January 1, 2006. Based upon the long-standing
20
interpretation by the Department, this change encompassed machinery used in the forestry and logging business.
• In 2005, the General Assembly exempted from tax sales to farmers of machinery, attachments and repair parts for the machinery, and lubricants applied to the machinery. It also expanded the 1% privilege tax with an $80 cap, originally enacted in 2001, to include manufacturing fuel and major recycling equipment.
Thus, as of January 1, 2006, purchases of mill machinery, which includes commercial logging equipment, and mill machinery parts or accessories and manufacturing fuel, became exempt from sales and use tax, but were subject to the new privilege tax. The privilege tax is imposed on the purchaser of qualifying property, and the purchaser is liable for accruing and remitting the tax to the Department of Revenue. Examples of qualifying commercial logging equipment include log skidders, log carts, tree shears, feller bunchers, winches, chain saws, tractors, axes, and mallets when the items are used to cut and transport timber to a wood products manufacturer.
This act treats commercial logging machinery and related items the same as farm machinery under the current sales tax laws. First, the act exempts commercial logging items from the 1%/$80 maximum privilege tax, to which they are currently subject. The act also creates a new exemption in the sales and use tax statutes for commercial logging machinery, attachments and repair parts, lubricants, and fuel used to operate commercial logging machinery. The language of the exemption tracks the current exemption for farm machinery, as enacted in S.L. 2005-276.
Property Tax Changes.
Session Law
Bill #
Sponsor
S.L. 2006-30
HB 2097
Representative Brubaker
AN ACT TO MAKE CLARIFYING CHANGES TO THE PROPERTY TAX LAWS.
OVERVIEW: This act, which was a recommendation of the Revenue Laws Study Committee, makes the following changes to the property tax laws:
• It allows the electronic listing of individual as well as business personal property.
• It clarifies that 60% of only the first month's interest collected on delinquent registered motor vehicle taxes is transferred to the Combined Motor Vehicle and Registration Account, not the total interest collected on the unpaid taxes.
• It gives a county board of equalization and review the authority to approve late applications for present use-value appraisal of property.
• It validates the current practice of allowing tax collectors to receive tax receipts for assessments that have been or are subsequently appealed to the Property Tax Commission and to send the taxpayer an initial bill for those taxes.
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FISCAL IMPACT: This act does not impact State revenues and does not have a significant impact on local revenues.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: The act became effective when signed into law by the Governor on June 26, 2006.
ANALYSIS: This act makes several changes to the property tax statutes.
Electronic Listing
The General Assembly enacted legislation in 2001 to allow counties to adopt a resolution providing for the electronic listing of business personal property.10 This act extends a county's authority to provide electronic listing to include individual personal property11 as well as business personal property. If the county commissioners adopt such a resolution, then the assessor must include information on how to list electronically in the listing notice sent to taxpayers. An abstract submitted by electronic listing is considered filed when received in the office of the assessor.
This act does not extend the listing deadline for individual personal property. The listing period begins on January 1 and ends on January 31. A county may, for good cause, give an individual taxpayer an extension until April 15 to list personal property. Under current law, a county may extend the period for electronic listing of business personal property until June 1.
Clarifying Change
The act makes a clarifying change to legislation enacted during the 2005 Session. S.L. 2005-294 created a combined system for the registration and taxation of motor vehicles, effective July 1, 2009.12 Under the new combined system, consumers will receive one statement per registered vehicle containing all the registration fees and property taxes due on the vehicle. The Division of Motor Vehicles, or its agent, will be responsible for collecting the fees and taxes due.
To pay for the new system, the 2005 legislation increased the first month's interest on delinquent registered motor vehicle taxes from 2% to 5%, effective January 1, 2006, and required that 60% of the interest collected on unpaid taxes be transferred on a monthly basis to the Combined Motor Vehicle and Registration Account in the Treasurer's Office. Funds in this Account may only be transferred to the DMV for the purpose of implementing the combined system, at the direction of the North Carolina Association of County Commissioners. The intent of the sponsors of the 2005 legislation was that 60% of only the first month's interest would be transferred to the Account, not the total interest collected on unpaid taxes. This act clarifies this intent.13
10 S.L. 2001-279.
11 Examples of individual personal property include automobiles, boats, and mobile homes.
12 Section 31.5 of S.L. 2006-259 changed this effective date to July 1, 2010.
13 In December 2005, the North Carolina Department of State Treasurer issued a memorandum directing counties to only remit 60% of the first month's interest to the Treasurer. The memorandum stated that this was the true intent of the legislation and that it anticipated that language clarifying this intent would be enacted during the 2006 Session. The memorandum was sent to all county managers, finance officers, tax administrators, tax assessors, tax collectors, and certified public accountants.
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Late Application for Present Use-Value
The act gives a county board of equalization and review the authority to approve a late application for present use-value appraisal of property if the applicant demonstrates good cause for the delay.14 If the county board of equalization and review is not in session, then the late filing may be approved by the board of county commissioners. Existing law provides for similar approval for late applications for property tax exemptions or exclusions.15
Tax Receipts for Assessments
Each year the county board of commissioners or the municipal governing body directs the tax collector to collect taxes charged in the tax records and receipts. The tax receipt sets out the name and address of the taxpayer, the assessment of the taxpayer's property, the rate of tax levied, and the amount of property taxes and any penalties due. Prior law stated that no tax receipts could be delivered to the tax collector for any assessment appealed to the Property Tax Commission until the appeal had been finally adjudicated. In practice, boards of equalization and review often adjourn on June 30, except to hear appeals filed prior to June 30. The tax collector receives the tax receipts by August 1.
This act validates the current practice of allowing tax collectors to receive tax receipts for assessments that have been or are subsequently appealed to the Property Tax Commission, but clarifies that the tax collector may not seek any remedies for collection of the taxes or enforcement of the tax lien pending final adjudication of appeal from the assessment. The tax collector may, however, send an initial bill or notice to the taxpayer pending final adjudication. By providing notice pending appeal, the taxpayer may choose to avoid the amount of interest that accrues while the appeal is pending. If the taxpayer wins on appeal, the taxpayer receives a refund of any taxes paid plus interest. The current practice also puts a potential buyer of property on notice of a tax bill if the property is transferred pending the appeal.
The act also makes a conforming change in the law concerning the annual settlement the tax collector makes with the governing body of its taxing unit. A tax collector is liable for the faithful performance of his or her collection duties. Each year, a tax collector must make a sworn report to the governing body of the taxing unit showing what taxes remain unpaid at the end of the fiscal year. In this final settlement for the preceding fiscal year, a collector is charged with the total amount of taxes for collection, less any amounts that may be credited to the collector in the settlement. 16 This act adds to the list of items that may be credited to the collector the principal amount of taxes for any assessment appealed to the Property Tax Commission when the appeal has not been finally adjudicated.
14 Generally, an application for present-use value must be filed during the regular listing period: January 1 through January 31.
15 G.S. 105-282.1(a1).
16 Charges include the total amount of all taxes placed in the collector's hands for collection for the year, all late-listing penalties and costs collected by the collector, all interests on taxes collected by the collector, and any other sums collected or received by the tax collector. Credits include all sums deposited by the collector to the credit of the taxing unit, releases allowed by the governing body, discounts allowed for early payment of taxes, the principal amount of taxes constituting liens against real property, the principal amount of taxes determined to be insolvent and to be allowed as credits, and any commission the collector is entitled to deduct from amounts collected.
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SSTA Sales Tax Defn/Sales Tax Payments.
Session Law
Bill #
Sponsor
S.L. 2006-33
HB 1915
Representative Hill
AN ACT TO INCORPORATE THE STREAMLINED SALES TAX DEFINITIONS CONCERNING TELECOMMUNICATIONS, TO SIMPLIFY THE TAX PAYMENT REQUIREMENTS FOR SEMIMONTHLY TAXPAYERS, AND TO TREAT TANGIBLE PERSONAL PROPERTY USED IN MODULAR HOMES THE SAME AS TANGIBLE PERSONAL PROPERTY USED IN OTHER HOMES.
OVERVIEW: This act, which was a recommendation of the Revenue Laws Study Committee, does three things:
• Incorporates several definitions from the Streamlined Sales Tax Agreement into North Carolina law.
• Changes the tax payment requirements for semi-monthly sales tax payers.
• Allows a credit for sales tax paid on tangible personal property that is added to a modular home and sold with the modular home.
FISCAL IMPACT: The changes made with respect to definitions under the Streamlined Sales Tax Agreement have no fiscal impact on the State, but the changes with respect to sourcing of prepaid wireless may have a minimal impact on local governments. Minimal to no fiscal impact is expected from the changes regarding tax payment schedules.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: Different parts of the act have different effective dates as described below.
ANALYSIS: The act makes the following changes to the revenue laws.
Streamlined Sales Tax Agreement
Sections 1 through 8 of the act modify the definitions that apply to telecommunications services for sales and use tax purposes. The changes were made to adopt the definitions in the Streamlined Sales Tax Agreement (hereinafter Streamlined Agreement). These changes become effective January 1, 2007.
Section 1 of the act makes the following changes in G.S. 105-164.3, the definitions section of the sales and use tax laws:
• Adds a definition of the term 'ancillary service' because the definitions in the Streamlined Agreement separate ancillary services from telecommunications services. Previous North Carolina law considered ancillary services to be part of telecommunications services. All of the ancillary services were taxed under previous law and will continue to be taxed.
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• Modifies the definition of 'prepaid telephone calling service' to include the newly defined terms for 'prepaid wireless calling service' and 'prepaid wireline calling service'. Previous law did not distinguish between prepaid wireline and prepaid wireless. The definition of prepaid wireless was added to recognize that prepaid wireless includes whatever other services can be obtained with the same card used to obtain wireless telecommunications service. Prepaid cards are taxed at the point of sale rather than as telecommunications service when the minutes are used. Some services that are not within the definition of telecommunications service can be purchased with the card that authorizes prepaid wireless use. The current definition of prepaid telephone calling service has an exclusive use requirement that conflicts with the practice for prepaid wireless.
• Converts the current definition of prepaid telephone calling service into the definition of 'prepaid wireline calling service'. This change is technical.
• Adds a definition for 'prepaid wireless calling service'. This definition does not have an exclusive use requirement, in contrast to prepaid wireline.
• Updates the definition for 'Streamlined Agreement' to include the latest amendments made January 13, 2006.
• Conforms the definition of 'telecommunications service' to the Streamlined definition and incorporates into the definition the appropriate inclusions and exclusions that are now in G.S. 105-164.4C(b) and (c). As changed, the definition is the same as previous law with two exceptions. The first exception relates to Universal Service Fund surcharges. The second exception is related to paging service. With these changes, these charges are part of the sales price and will be subject to tax. Universal Service Fund surcharges could not be 'carved out' and remain as under previous law because there is no Streamlined carve out in sales price or telecommunications service for this surcharge. Paging service may be carved out because there is a Streamlined definition for this, but this act does not include that carve out.
Section 2 of this act changes the tax imposition statute to add the now separate category of 'ancillary service' and to include non-telecommunications services that are sold as part of a prepaid wireless calling service.
Section 3 of this act makes a conforming change to the sourcing statute to apply the new definition of prepaid wireless call service.
Section 4 of this act makes conforming changes to the separate statute on telecommunications to include ancillary service and to apply the new definition of prepaid wireless calling service.
Section 5 of this act moves to the exemption statute the items that were formerly excluded from the definition of telecommunications and are not intended to be taxed. This change maintains the current tax treatment of these services.
Sections 6 through 8 of this act add the now separate category of 'ancillary service' in the exemption statute, in the direct pay permit statute, and in the local distribution statute.
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Section 12 of this act repeals the requirement that a certified automated system must be able to determine whether an exemption certificate offered by a purchaser is a valid certificate based upon a State registry because the Streamlined Agreement does not require this determination. The section became effective June 1, 2006, because the first certification of an automated system under the Streamlined Sales Tax Act occurred around that date. Under the Streamlined Sales Tax Act, a seller may collect and remit the sales and use tax due a state through either a certified service provider or it may do it itself through the use of a certified automated system. A certified automated system is a software program certified by the Secretary of Revenue as being able to correctly determine the applicable State and local sales tax rate. G.S. 105-164.44H(a) lists the specific requirements a certified automated system must meet to be certified. This section removes one of the requirements because it is not a requirement under the Agreement.
Sales Tax on Modular Homes
Previous law stated that the retail sale of a modular home was the sale of the home to a modular homebuilder. It assumed that a manufacturer would sell to a modular homebuilder who would then enter into a performance contract with a customer to construct the home. This assumption was not accurate when the manufacturer sold the modular home directly to the customer who would occupy the home.
Section 13 of the act addresses two issues. First, it clarifies the law concerning a retail sale of a modular home by including within the scope of a retail sale all sales to the customer who will occupy the home. It does this by removing the previous limitation that defined a retail sale as a sale to a modular homebuilder. Second, it allows a credit for sales and use tax paid on materials used in the home. G.S. 105-164.6 allows a credit against this State's sales tax for any sales or use tax paid in another state on the same item. This provision does not apply, however, to taxes paid in another state on materials that are included in a modular home that is taxed when it is sold to a modular homebuilder because the taxes paid to the two states are on different items. This section allows credit for sales tax paid on the items that are included in the home.
This part of the act became effective July 1, 2006, and applies to purchases made on or after that date.
Simplify Semi-Monthly Tax Payments
Under previous law, taxpayers that were liable for at least $10,000 a month in sales tax, electric utility tax, or piped natural gas excise tax were required to pay tax twice a month. For these taxpayers, the month was split into two periods – the first day of the month through the 15th of the month, and the 16th of the month through the end of the month. The tax payment for the 1st through 15th period was due by the 25th of the same month and the tax payment for the 16th through the end of the month was due by the 10th day of the following month. Therefore, taxpayers had 10 days after the end of a semimonthly period to make a payment. In addition to the payments, these taxpayers also were required to file a return. The sales tax return was due monthly by the 20th and the electric utility and piped gas returns were, and remain, due quarterly by the end of the month after the close of the quarter.
Several large retailers in the Streamlined Sales Tax project asked North Carolina to look at its payment schedule to determine if it could require payments to be made only once a month. North Carolina is one of only a few states that require payments twice a month.
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Sections 9, 10, and 13 of the act replace the semimonthly payment schedule with a single monthly payment and a prepayment of the next month’s liability due on the same day as the monthly payment. The result is that taxpayers will have more time to gather data before filing a return and will make payments on only one day of the month. Under the act, the taxpayer makes one payment on the 20th of the month. That payment includes any amount remaining due for the preceding month and 65% of the amount estimated to be due for the current month. The State will experience a slight one-time increase in revenue in the first month that the prepayment schedule takes effect.
The prepayment must equal at least 65% of one of three thresholds:
• The current month’s liability.
• The liability for the same month the preceding year.
• The average monthly liability for the past calendar year.
These thresholds are easily determined and eliminate the need for the taxpayer to calculate actual liability for periods of less than a month. The 65% threshold was chosen because it was suggested by the retailers who requested North Carolina to review its law and the prepayment date is about 2/3 of the time in a month. A similar method and threshold are already in place in Florida and Arkansas.
The act eliminates the provisions concerning penalty relief for small underpayments because the relief is no longer needed. The relief was provided under previous law because the law required taxpayers to calculate liability for short periods within 10 days after the end of the period. Under this act, sales tax taxpayers have 20 days after the end of the month to file a return and electric utility and piped gas taxpayers have a full month after the end of a quarter to file a return.
This part of the act becomes effective October 1, 2007.
Mill Rehabilitation Tax Credit.
Session Law
Bill #
Sponsor
S.L. 2006-40
HB 474 As amended by S.L. 2006-25217
Rep. Ross, Howard, Brubaker, Goodwin
AN ACT TO PROVIDE A TAX CREDIT FOR REVITALIZATION OF HISTORIC MILL FACILITIES AND TO PROVIDE AN ENHANCED HISTORIC REHABILITATION CREDIT FOR REHABILITATION EXPENSES WITH RESPECT TO A FACILITY THAT WAS ONCE A STATE-OWNED TRAINING SCHOOL FOR JUVENILE OFFENDERS.
17 S.L. 2006-252 replaced the tax credits under the Bill Lee Act with more narrowly focused credits. The act replaced 'enterprise tiers' with 'development tiers' and reduced the number of tiers from five to three. S.L. 2006-252 made changes to this act to conform to the changes made in it.
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OVERVIEW: This act does three things:
• It provides an enhanced credit for rehabilitating a facility that at one time was a State-owned training school for juvenile offenders.
• It provides an income tax credit for rehabilitating vacant historic manufacturing sites if the taxpayer spends at least $3 million to rehabilitate the site. The credit is a percentage of the qualified rehabilitation expenditures or rehabilitation expenses. The percentage amount of the credit varies depending on the development tier location of the site and its eligibility for the federal credit.
• It eliminates the requirement that in order for a project to be eligible for a credit for rehabilitating non-income producing property it must receive the certification of the State Historic Preservation Officer before the commencement of work.
FISCAL IMPACT: The act is expected to decrease General Fund revenues $2.8 million in fiscal year 2006-07. This loss grows to an anticipated $14.7 million in fiscal year 2008-09 before beginning to decline. Preservation NC estimates there are approximately 30 to 35 mill properties out of more than 200 eligible properties throughout North Carolina likely to be rehabilitated as a result of this tax credit.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: The act is effective for taxable years beginning on or after January 1, 2006, and applies to eligible sites placed into service on or after July 1, 2006. The act expires for qualified rehabilitation expenditures and rehabilitation expenses incurred on or after January 1, 2011.
ANALYSIS: North Carolina has two income tax credits for rehabilitating an historic structure. One credit is allowed to taxpayers that qualify for the federal historic rehabilitation credit. The federal tax credit is available for rehabilitating only income-producing historic structures, and is equal to 20% of the rehabilitation expenses. The amount of the North Carolina credit is 20% of the expenses that qualify for the federal credit. The second credit is allowed to taxpayers that rehabilitate an historic structure that is not income producing, and thus not eligible for the federal credit. The credit is equal to 30% of the rehabilitation expenses. To qualify for the credit for rehabilitating a non-income producing historic structure, the taxpayer must spend more than $25,000 within a 24-month period. The North Carolina credit for both income-producing structures and non-income producing structures must be taken in installments over five years after the structure is placed in service, and any unused portion of the credit may be carried forward for five years. A pass-through entity may allocate the credit to an owner if an owner's adjusted basis in the pass-through entity is at least 40% of the amount allocated to that owner.
Enhanced Credit
The act amends the tax credit allowed for rehabilitating an historic structure by increasing the credit amount for rehabilitating a facility that was once a State-owned training school for juvenile offenders. The amount of credit such a facility may be eligible to receive is increased to 40% of the qualified rehabilitation expenditures or rehabilitation expenses rather than 20% or 30%, respectively. This provision allows for an enhanced credit for a rehabilitation
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of the facilities of the former Stonewall Jackson Manual Training and Industrial School in Cabarrus County.
Mill Rehabilitation Credit
The act also establishes an enhanced tax credit for rehabilitating vacant historic manufacturing sites. This credit may be taken in place of the existing credit for historic rehabilitation, not in addition to it. The tax credit enacted by this act for rehabilitating historic manufacturing sites differs from the tax credit for historic rehabilitation in several ways. The amount of the credit is larger, the credit may be taken against one of three taxes, in some instances the credit may be taken in the year the property is placed into service, and any unused portion of the credit may be carried forward for nine years.
To be eligible to claim the credit for rehabilitating a vacant historic manufacturing site, a taxpayer must spend at least $3 million to rehabilitate the site. To qualify for the credit, the site must satisfy all of the following conditions:
• The site was used as a manufacturing facility or for purposes ancillary to manufacturing, as a warehouse for selling agricultural products, or as a public or private utility.
• The site has been at least 80% vacant for a period of at least two years immediately preceding the date the eligibility certification is made.
• The site is a certified historic structure or a State-certified historic structure.
The amount of the credit depends upon the development tier in which the site is located and the eligibility of the site for a federal credit as follows:
• 40% of qualified rehabilitation expenditures or rehabilitation expenses – If the site is located in a development tier one or two, regardless of whether the taxpayer is allowed a federal credit.
• 30% of qualified rehabilitation expenditures – If the site is located in a development tier three and the taxpayer is allowed a federal credit.
• No credit is allowed if the site is located in a development tier three and the taxpayer is not allowed a federal credit.
If the credit is taken for income-producing property, it may be taken in the year the property is placed in service. If the credit is taken for non-income-producing property, the credit must be taken in five equal installments beginning with the taxable year in which the property is placed in service.
The credit allowed may be claimed against the income tax, the franchise tax, or the gross premium tax. The taxpayer must elect the tax against which the credit will be claimed, and this election is binding.
The credit may not exceed the amount of the tax against which the credit is claimed for the taxable year reduced by the sum of all credits allowed, except payment of tax made by the taxpayer. Any unused portion of the credit may be carried forward for nine years.
A pass-through entity may allocate the credit among any of its owners without limitation as long as the owner's adjusted basis in the pass-through entity is at least 40% of the amount of
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credit allocated to the owner.18 An owner of a pass–through entity that qualifies for the credit will forfeit a portion of any credit the owner has received if both of the following conditions are met:
• The owner disposed of the interest within five years from the date the eligible site is placed into service.
• The owner's interest in the pass-through entity is reduced to less than two-thirds of the owner's interest in the pass-through entity at the time the eligible site was placed into service.
The forfeiture of an owner's interest is not required if the change in ownership is the result of the owner's death or the merger, consolidation, or similar transaction requiring approval by the shareholders, partners, or members of the entity, to the extent the entity does not receive cash or tangible property in the transaction. A taxpayer or owner of a pass-through entity that forfeits a credit is liable for all past taxes avoided as a result of the credit plus interest computed from the date the taxes would have been due if the credit had not been allowed.
Certification by the State Historic Preservation Officer
To qualify for either the historic rehabilitation tax credit or the mill rehabilitation tax credit, the State Historic Preservation Officer must certify that the facility comprises an eligible site and that the rehabilitation is a certified rehabilitation. A taxpayer must provide the Secretary of Revenue with documents showing that the State Historic Preservation Officer certifies the site and rehabilitation and showing the amount of rehabilitation expenditures or expenses. Under prior law, the certification of the repairs or alterations had to be obtained by the taxpayer from the State Historic Preservation Officer prior to the commencement of the work. This act eliminates the timing of this requirement for both the credit enacted by this act and for the pre-existing credit for rehabilitating an historic structure.19
Modify Appropriations Act of 2005.
Session Law
Bill #
Sponsor
S.L. 2006-66
SB 1741
Senator Garrou
AN ACT TO MODIFY THE CURRENT OPERATIONS AND CAPITAL APPROPRIATIONS ACT OF 2005, TO INCREASE TEACHER AND STATE EMPLOYEE PAY, TO REDUCE THE SALES TAX RATE AND THE INCOME TAX RATE APPLICABLE TO MOST SMALL BUSINESSES, TO CAP THE VARIABLE WHOLESALE COMPONENT OF THE MOTOR FUEL TAX RATE AT ITS CURRENT RATE, TO ENACT OTHER TAX
18 A pass-through entity may also allocate the credit for rehabilitating an historic structure among its owners in the same manner as provided in this provision.
19 The taxpayer is still required to receive certification from the State Historic Preservation Officer that the repairs or alterations comply with federal standards, but the timing of that certification is immaterial.
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REDUCTIONS, AND TO PROVIDE FOR THE FINANCING OF HIGHER EDUCATION FACILITIES AND PSYCHIATRIC HOSPITALS AND OTHER CAPITAL PROJECTS.
OVERVIEW: This act is The Current Operations and Capital Improvements Appropriations Act of 2006. In addition to the budget provisions, the act makes many tax law changes and authorizes the issuance of special indebtedness to finance several capital projects across the State. The tax law changes made in this act include the following:
• It reduces the sales tax rate from 4.5% to 4.25%, effective December 1, 2006.
• It reduces the upper individual income tax bracket from 8.25% to 8%, effective for taxable years beginning on or after January 1, 2007, and from 8% to 7.75%, effective for taxable years beginning on or after January 1, 2008.
• It caps the variable wholesale component of the motor fuels tax rate for one year and holds the Highway Fund harmless for any potential revenue loss.
• It creates a new tax credit for small businesses that provide health benefits to their eligible employees, effective for taxable years beginning on or after January 1, 2007, and expiring for taxable years beginning on or after January 1, 2009.
• It extends the sunset for refunds of the State sales and use tax on fuel used by interstate passenger air carriers and on aviation fuel used by a motorsports racing team or a motorsports sanctioning body. The refunds were scheduled to expire for purchases made on or after January 1, 2007; the act extends the date of expiration to January 1, 2009.
• It extends the sunset on the tax credit for constructing renewable fuel production facilities from January 1, 2008, to January 1, 2011, and it creates an enhanced credit if the taxpayer invests at least $400 million in three separate facilities over a five-year period.
• It creates a tax credit for certain biodiesel providers, effective January 1, 2007, and expiring January 1, 2010.
• It exempts qualifying research and development equipment from State and local sales and use tax and imposes a 1% privilege tax with an $80 cap, effective July 1, 2007.
• It provides a sales and use tax refund for a professional motorsports racing team for purchases of professional motor racing vehicle component parts other than tires or accessories made by it, effective July 1, 2007.
• It provides a married couple with the option of filing jointly if they file a federal joint return and if one spouse is a nonresident with no income from North Carolina, effective for taxable years beginning on or after January 1, 2006.
• It allows an individual taxpayer to deduct a maximum amount of $750 contributed by the taxpayer to an account in the Parental Savings Trust Fund. A married couple filing jointly may deduct a maximum of $1,500. To qualify for the deduction, the adjusted gross income of the individual taxpayer or married 31
couple filing jointly must not exceed a specified amount. The deduction is effective for taxable years beginning on or after January 1, 2006. The deductible amount increases for taxable years beginning on or after July 1, 2007. The deduction is repealed for taxable years beginning on or after January 1, 2011.
• It provides an exemption from the sales and use tax on sales of tangible personal property and electricity to an eligible Internet data center, effective for sales made on or after October 1, 2006.
• It amends the definition of 'corporation', as it applies to the franchise tax statutes, to include a limited liability company (LLC) that elects to be taxed as a C Corporation for federal income tax purposes. The effect of this change is that the corporate franchise tax will apply to these LLCs. The change is effective for taxable years beginning on or after January 1, 2007.
• It expands the royalty payment reporting option for corporations and their related members to include payments received for use of patents and copyrights, effective for taxable years beginning on or after January 1, 2006.
FISCAL IMPACT: The tax changes enacted in this act reduce General Fund revenues by approximately $193.5 million for fiscal year 2006-2007. The act authorizes approximately $254 million in special indebtedness for the fiscal year 2006-2007, and another $419 million in the future.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: The act contains varying effective dates.
ANALYSIS: The act makes the following finance law changes.
Transfer of Tax Proceeds from Highway Trust Fund to General Fund.
Each fiscal year, a certain sum of highway use tax proceeds is transferred from the Highway Trust Fund to the General Fund. The first amount is equal to $1.7 million. In 2005, the General Assembly altered that amount for fiscal years 2005-2006 and 2006-2007 by requiring a transfer of $250 million in each of those fiscal years. Section 2.2(e) of the act reduces the transfer amount to $55 million for fiscal year 2006-2007 only.
The second amount required to be transferred annually from the Highway Trust Fund to the General Fund is determined by a formula. The formula is determined by adjusting the amount distributed in the previous fiscal year, which began as a base of $2.4 million in fiscal year 2002-2003, plus or minus a percentage of this sum equal to the percentage by which tax collections have increased or decreased for the most recent 12-month period for which data is available. Using this formula, the second amount transferred to the General Fund for fiscal year 2006-2007 is $2,486,602.
Consultation Not Required Prior to Establishing or Increasing Fees pursuant to the Executive Budget Act
Section 6.3 of the act provides that an agency is not required to consult with the Joint Legislative Commission on Governmental Operations pursuant to G.S. 12-3.120 prior to
20 G.S. 12-3.1 provides that before an agency's rule to establish or increase a fee can become effective, the agency must consult with the Joint Legislative Commission on Governmental Operations on the amount and
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establishing or increasing a fee authorized or anticipated in the Current Operations and Capital Improvements Appropriations Act of 2006, or in the Senate and House of Representatives Appropriations Committee Reports on the Continuation, Expansion and Capital Budgets, that were distributed in the Appropriations and Base Budget Committees and used to explain this act. The statutory consultation requirement is unnecessary since the General Assembly already considered these fees in the Appropriation Act of 2006 and Committee Reports.
No Increases that the General Assembly has Rejected
Section 6.4 of the act amends the Executive Budget Act by adding a statute prohibiting a fee increase if the General Assembly has rejected an increase in that fee for the current fiscal period. For purposes of this section, the General Assembly has rejected a fee increase when that fee is included in a bill which fails a reading or is in a version of a bill that passes one house but is enacted without the fee increase.
Refund of Local Sales and Use Taxes to a Local School Administrative Unit
Prior to the 2006-2007 fiscal year, local school administrative units were eligible for an annual refund of sales and use taxes paid by the unit. In 2005, the General Assembly repealed the provision which authorized the refund for local school administrative units in an attempt to redirect estimated State sales tax revenues refundable to LEAs to the State Public School Fund for allotment through State position, dollar, and categorical allotments. However, the amount that was transferred to the State Public School Fund was sufficient to offset only the State portion of the taxes that were previously refunded. The effect of this was to reduce the amount going to the public schools. Section 7.20 of the act maintains the repeal of the refund of the State taxes, but allows local school administrative units to apply for a refund of the local sales and use taxes paid by the unit. As before, the refund applies to sales and use taxes paid on direct purchases of tangible personal property, other than telecommunications and electricity, and indirect purchases of building materials. Also as before, the request for a refund must be in writing and is due within six months after the end of the entity's fiscal year. This is the only instance in which a taxpayer is eligible for a refund of local sales and use taxes when the taxpayer is not also eligible for a refund of State sales and use taxes. This change is effective retroactive for purchases made on or after July 1, 2005.
Revised Maximums for Collection Assistance Fees
Section 19.2 of the act increases the maximum amount of collection assistance fee proceeds that the Department of Revenue may apply to taxpayer locator services from $100,000 to $150,000 per year and adds a yearly limit of $353,000 to the amount of the fees that may be applied towards postage or other delivery charges for correspondence related to collecting overdue tax debts. In 2001, the General Assembly established a system under which the cost of collecting overdue tax debts is to be borne by the delinquent taxpayers, not by the taxpayers who pay their taxes on time. The collection assistance fee is 20% of the overdue tax debt and is a receipt of the Department.21 The proceeds of the fee are credited to a
purpose of the fee to be established or increased. If the Commission does not hold a meeting to hear the consultation request within a specified time, then the consultation requirement is deemed satisfied.
21 Section 22.6 of S.L. 2005-276 amended the law to provide that the amount of the collection assistance fee would be the actual cost of collection, not to exceed 20% of the amount of the overdue tax debt. However,
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special, non-reverting account to be used only for collecting overdue tax debts. The Department of Revenue may apply the fee proceeds for the following purposes:
• To pay contractors for collecting tax debts.
• To pay the fee charged by the federal government for collecting tax debts by offset.
• To pay for taxpayer locator services. Section 19.2 increases the dollar amount that may be used to pay for these services from a maximum of $100,000 a year to a maximum of $150,000 a year.
• To pay for postage or other delivery charges for correspondence relating to collecting overdue tax debts. Section 19.2 sets a dollar limit of $353,000 a year on the amount that may be used to pay for postage and delivery charges.
• To pay operating expenses for Project Collection Tax and the Taxpayer Assistance Call Center.
• To pay the expenses of the Examination and Collection Division related to collecting overdue tax debts.
Consolidate Tax Project Reports
Section 19.3 of the act moves the statutory requirement that the Department of Revenue report on its efforts to collect tax debts and on its use of the proceeds of the collection assistance fee from G.S. 105-243.1 to G.S. 105-256. G.S. 105-256(a) contains a list of the reports the Department must provide. This section adds the report of its collection efforts to this list.
Special Indebtedness Projects
Section 23.12 of the act authorizes the issuance of special indebtedness to finance the capital facility costs, including construction or renovation, of the following projects and in the following amounts:
• North Carolina Museum of Art - $40 million.
• Central Regional Psychiatric Hospital for the Department of Health and Human Services - $20 million.
• A new Secondary State Data Center - $24,841,300.
• A new Center City Classroom Building at the University of North Carolina-Charlotte - $45,827,400.
• The Department of Health and Human Services Public Health Laboratory and Office of Chief Medical Examiner - $101 million.
• The Eastern Regional Psychiatric Hospital for the Department of Health and Human Services - $145 million. The indebtedness must be incurred over a period
Section 37 of S.L. 2005-345 subsequently repealed this section, leaving the amount of the collection assistance fee at 20% of the amount of the overdue debt.
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of time: no more than $20 million may be incurred prior to July 1, 2007; and no more than $100 million may be incurred prior to July 1, 2008.
• The Regional Medical Center and Mental Health Center of the Department of Correction - $132,200,000. The indebtedness must be incurred over a period of time: no more than $8.2 million may be incurred prior to July 1, 2007; no more than $58.2 million may be incurred prior to July 1, 2008; and no more than $98.2 million may be incurred prior to July 1, 2009.
• The Western Regional Psychiatric Hospital for the Department of Health and Human Services - $162.8 million. However, no indebtedness may be incurred prior to July 1, 2008.
Reduce Sales Tax Rate Early
Section 24.1 of the act provides for an earlier reduction of the State sales tax rate from 4.5% to 4.25%, effective December 1, 2006. Prior to October 16, 2001, the general rate of State sales tax was 4%. Effective October 16, 2001, the general rate was raised to 4.5%. The general rate was set for reduction back to 4% on July 1, 2007. This section moved up the date of reduction of the State sales tax to 4.25% from July 1, 2007, to December 1, 2006. The remaining quarter-cent will expire as scheduled on July 1, 2007. The cost of the early sales tax reduction is estimated at $140.1 million for 2006-07.
Reduce Income Tax Rate Applicable to Most Small Businesses Early
Section 24.2 of the act provides for an earlier reduction in the upper-income individual tax bracket rate than provided under previous law. The rate will be reduced from 8.25% to 8%, effective for taxable years beginning on or after January 1, 2007.22 The rate will then be further reduced to 7.75% in 2008 as provided under previous law. In 2001, the General Assembly added a new tax bracket that imposed an additional one-half percent income tax (a total rate of 8.25%) on certain North Carolina taxable income for three years. In 2003 the General Assembly extended the rate to 200623 and in 2005 the General Assembly extended the rate until 2008.24 The change was estimated to affect approximately 2% of North Carolina taxpayers. The anticipated impact of this change on General Fund revenues is a one-time reduction of $28.6 million in non-recurring revenues in FY 2006-07.
Prior to 2001, tax was imposed at the following rates on individuals' North Carolina taxable income:
Tax Rate
Married filing jointly
Heads of household
Single filers
Married filing separately
6%
Up to $21,250
Up to $17,000
Up to $12,750
Up to $10,625
7%
Over $21,250 and up to $100,000
Over $17,000 and up to $80,000
Over $12,750 and up to $60,000
Over $10,625 and up to $50,000
7.75%
Over $100,000
Over $80,000
Over $60,000
Over $50,000
22 The Governor's budget recommended a phase down of the upper income tax rate to 8% in 2006 and the elimination of this bracket in 2007.
23 S.L. 2003-284, Section 39.1.
24 S.L. 2005-276, Section 36.1. 35
The 2001 law created a fourth tax bracket for North Carolina taxable income as follows:
Tax Rate
Married filing jointly
Heads of household
Single filers
Married filing separately
8.25%
Over $200,000
Over $160,000
Over $120,000
Over $100,000
Cap Variable Wholesale Component of Motor Fuels Tax Rate and Hold Highway Fund Harmless
A motor fuel excise tax is imposed on all motor fuel sold, distributed, or used in the State. The rate of tax consists of a flat rate of 17.5¢ per gallon plus a variable wholesale component equal to the greater of 7% of the average wholesale price of motor fuel during a base six-month base period or 3.5¢ per gallon. The variable wholesale rate for the period of January 1, 2006, through June 30, 2006 was 12.4¢ per gallon, and the total rate was 29.9¢ per gallon. One-half cent per gallon of the excise tax is allocated to various environmental funds. Of the remaining excise tax revenue, 75% goes to the Highway Fund and 25% goes to the Highway Trust Fund.
Section 24.3 of the act caps the variable wholesale component of the motor fuel excise tax rate at its current rate of 12.4¢ per gallon for the period of July 1, 2006, through June 30, 2007. In addition, Section 2.2(g) of the act provides a reserve in the General Fund for the purpose of holding harmless the Highway Fund and the Highway Trust Fund in the event that the variable wholesale component of the excise tax would have exceeded 12.4¢ per gallon, if it were not capped.25 If the calculated variable component of the motor fuel excise tax rate exceeds the cap, the State Treasurer is directed to transfer funds, on a monthly basis, from the reserve account to the Highway Fund and the Highway Trust Fund. The amount transferred is the difference between the amount of motor fuel excise tax revenue allocated to each of those funds for a month and the amount that would have been allocated to it if the variable wholesale component were not capped at 12.4¢ per gallon. The total amounts that may be transferred to the Highway Fund and the Highway Trust Fund are limited to $17.6 million and $5.7 million, respectively. Funds remaining in the Reserve for Motor Fuels Tax Ceiling on June 30, 2007 revert to the Savings Reserve Account within the General Fund on that date.
These two sections became effective July 1, 2006.
Small Business Health Insurance Tax Credit
Section 24.4 of the act creates a new tax credit for small businesses that provide health benefits to their eligible employees. A 'small business' is defined as a taxpayer that employs no more than 25 full-time employees. An 'eligible employee' is one that works a normal workweek of 30 or more hours. In order to be eligible for the credit, either (1) the business must pay at least 50% of the premiums for health insurance coverage that equals or exceeds the minimum provisions of the basic health care plan of coverage recommended by the Small Employer Carrier Committee, or (2) the employee has existing coverage under one or more of the following: Medicare; Medicaid; a government funded program; or a health insurance or benefit arrangement that provides benefits similar to or in excess of benefits provided under the basic health care plan.
25 The amount allocated to the environmental funds is not affected because that amount depends on the number of gallons sold.
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The credit amount is equal to $250 per employee whose total wages or salary received from the business does not exceed $40,000 annually, not to exceed the taxpayer's cost of providing the health insurance benefit. The taxpayer may use the credit against either its income tax or its franchise tax liability. The credit may not exceed 50% of the taxpayer's tax liability. Any unused portions of the credit may be carried forward for five years. The credit is effective for taxable years beginning on or after January 1, 2007, and it expires for taxable years beginning on or after January 1, 2009.
Under the Internal Revenue Code, an employer may deduct premiums paid for health insurance cost of its employees as a business expense. This credit would be in addition to any expense deduction the taxpayer claimed on its income tax return for health insurance costs.
Expand Definition of Development Zone
Section 24.5 of the act expands the definition of a development zone to include an economic development and training district. Location in a development zone leads to more favorable treatment for the taxpayer under the Bill Lee Act with respect to the wage standard, the credit for creating new jobs, the credit for investing in machinery and equipment, and the credit for worker training and could result in extending the availability of the credits if certain other criteria are met with respect to a project. The effective date of this change is retroactive for taxable years beginning on or after January 1, 2004.
The General Assembly provided for the creation of economic development and training districts in 2003.26 An economic development and training district may be created for the purpose of providing a skills training center to prepare county residents to perform manufacturing, research and development, and related service and support jobs in the pharmaceutical, biotech, life science, chemical, telecommunications, and electronics industries. A county may levy property taxes within a district, in addition to those levied throughout the county, in order to finance the skills training center. A municipality cannot annex property within a district. The 2003 legislation provided that if the Board of Commissioners of Johnston County elected to establish an economic development and training district, then the district as initially established would consist of certain described real property owned by Bayer Corporation, Novo Nordisk Pharmaceutical Industries, Inc., Fresenius Kabi Clayton, L.P., and the Johnston County Airport Authority. The Johnston County commissioners created such a district.
The companies expanding in that economic development and training district understood they would be eligible for the Bill Lee tax credits applicable to a development zone. In retrospect, the property included in the district did not meet the requirements of a development zone. This act expands the definition of a development zone to include this property.
Extend Sunsets on Sales and Use Tax Refunds for Aviation Fuel
Section 24.6 of the act extends the sunset for refunds of the State sales and use tax on fuel used by interstate passenger air carriers and on aviation fuel used by a professional motorsports racing team or a motorsports sanctioning body from January 1, 2007, to January 1, 2009. This section became effective when the Governor signed it into law on July 10,
26 S.L. 2003-418.
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2006. The extension of the sunset is expected to reduce General Fund revenues by $90,000 in fiscal year 2006-2007.
In 2005, the General Assembly added a new refund allowable to interstate passenger air carriers for the net amount of sales and use tax paid by them on fuel during a calendar year in excess of $2,500,000. That same year, the General Assembly enacted a refund for motorsports racing teams and motorsports sanctioning bodies of the sales and use tax paid by them on aviation fuel used to travel to/from a motorsports event in this State, to travel to a motorsports event in another state from a location in this State, or to travel to this State from a motorsports event in another state. Those refunds became effective on January 1, 2005, and applied to purchases made on or after that date; they were scheduled to expire for purchases made on or after January 1, 2007. Section 24.6 of the act extends the date of expiration to January 1, 2009.
Ethyl Alcohol Tax Credit
Although the title of this section refers to ethyl alcohol, the credit itself applies to either ethyl alcohol or biodiesel. In 2004, the General Assembly created a credit for constructing renewable fuel production facilities. The credit is equal to 25% of the costs of constructing the facility. The credit may be claimed against income tax or franchise tax, is limited to 50% of the amount of tax liability against which it is claimed, and has a carryforward period of five years. That credit was set to sunset for taxable years beginning on or after January 1, 2008.
Section 24.7 of the act does two things. First, it extends the sunset on the credit for constructing renewable fuel production facilities and a related credit for constructing a renewable fuel dispensing facility until 2011. Second, it creates an enhanced credit if the taxpayer invests at least $400 million in three separate facilities over a five-year period. As with the current credit, the enhanced credit cannot exceed 50% of the amount of tax liability. Unlike the current credit, the enhanced credit may be claimed only against the income tax, but has a carryforward period of 10 years. A taxpayer may not claim both credits with respect to the same facility.
Tax Credit for Biodiesel Producer
Section 24.8 of the act provides for a tax credit for certain biodiesel providers. In order to qualify for the credit, the provider must be a producer of biodiesel27 (as opposed to an importer) that produces at least 100,000 gallons of biodiesel during the taxable year. The amount of the credit is equal to the per gallon excise tax (currently 29.9 cents per gallon) paid by the producer on the biodiesel. The credit may be claimed against income tax or franchise tax, is limited to 50% of the amount of tax liability against which it is claimed, and has a carryforward period of five years. The credit is repealed for taxable years beginning on or after January 1, 2010.
Research and Development Sales Tax Changes
27 For the purposes of this provision, biodiesel is liquid fuel derived in whole from agricultural products, animal fats, or wastes of agricultural products or animal fats. This differs from the definition of biodiesel for motor fuels excise tax purposes in that for motor fuel excise tax purposes the fuel may be derived in part from one of those substances.
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Mill machinery is taxed at a 1% rate with an $80 cap per article.28 Research and development equipment is subject to the 7% State and local sales tax rate. Section 24.9 of this act, as amended by Section 12 of S.L. 2006-196, exempts research and development equipment from State and local sales and use tax and imposes a 1% privilege tax with an $80 cap, thus affording this type of equipment the same tax treatment as mill machinery. In order to qualify, the equipment must meet all of the following requirements:
• Purchased by a research and development company in the physical, engineering, and life sciences that is included in industry 54171 of NAICS.29
• Capitalized by the taxpayer for tax purposes under the Code.
• Used by the taxpayer in the research and development of tangible personal property.
• Would be considered mill machinery if it were purchased by a manufacturing industry and is used in the research and development of tangible personal property manufactured by the industry.
This section becomes effective July 1, 2007.
Sales and Use Tax Refund for Motorsports Racing Teams
Section 24.10 of the act provides a sales and use tax refund for a professional motorsports racing team for purchases of professional motor racing vehicle component parts other than tires or accessories. The amount of the refund is equal to 50% of the sales and use tax paid. This section becomes effective July 1, 2007, and applies to purchases made on or after that date. A professional motorsports racing team is a racing team (1) operated for profit (2) that obtains the majority of its revenue from sponsorship of the racing team and prize money and (3) that competes in at least 66% of the races per season sponsored by a motorsports sanctioning body. In 2005, the General Assembly enacted a refund for motorsports racing teams30 and motorsports sanctioning bodies of the sales and use tax paid by them on aviation fuel used to travel to or from a motorsports event in this State, to travel to a motorsports event in another state from a location in this State, or to travel to this State from a motorsports event in another state.
Joint Filing Options
Prior to this act, a married couple who filed a federal joint return was required to file a North Carolina joint return if each spouse was either a resident or had North Carolina income. If one spouse was a nonresident and had no North Carolina income, that spouse was not subject to North Carolina income tax and the other spouse was required to file a separate return. This requirement is based on the fact that North Carolina has no jurisdiction to tax a person who is not a resident and does not have income from North Carolina sources. However, this approach can be burdensome and complicated because the couple must recompute their income separately in order to file a North Carolina return.
28 Prior to January 1, 2006, mill machinery was subject to a 1% State sales tax with an $80 cap per article. Last session, to comply with the uniform rate requirements of the Streamlined Sales and Use Tax Agreement, the General Assembly exempted mill machinery from the sales tax and began imposing a 1% privilege tax with an $80 cap.
29 'NAICS' is the North American Industrial Classification System. It divides businesses into categories based on the primary activity that occurs at an establishment.
30 Section 24.6 of this act inserts the defined term 'professional motorsports racing team' in the refund provisions for aviation fuel.
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Section 24.11 of the act, which originated as a Revenue Laws recommendation31 provides a married couple with the option of filing jointly if they file a federal joint return and if one spouse is a nonresident with no income from North Carolina. Because North Carolina does not have jurisdiction over the nonresident spouse, the act permits, but does not require, a joint return.32 This option would also allow North Carolina residents to file jointly in Georgia and South Carolina. Currently, these two states do not allow nonresident joint filing for residents of states that do not allow joint filings for Georgia and South Carolina residents.
This provision is effective for taxable years beginning on or after January 1, 2006.
Parental Savings Trust Fund Tax Deduction
Section 24.12 of the act allows an individual taxpayer to deduct from the taxpayer's taxable income a maximum amount of $750 contributed by the taxpayer to an account in the Parental Savings Trust Fund. A married couple filing jointly may deduct a maximum of $1,500. To qualify for the deduction, the adjusted gross income of the individual taxpayer or married couple filing jointly must not exceed a specified amount.33 The deduction is effective for taxable years beginning on or after January 1, 2006, and is repealed for taxable years beginning on or after January 1, 2011. For taxable years beginning on or after January 1, 2007, the deduction for an individual taxpayer is increased to a maximum of $2,000 and the deduction for a married couple filing jointly is increased to a maximum of $4,000.34 The Parental Savings Trust Fund Tax deduction is repealed for taxable years beginning on or after January 1, 2011.
In 1996, the General Assembly established the Parental Savings Trust Fund. The Fund is maintained by the State Education Assistance Authority, a political subdivision of the State, and is administered by the College Foundation of North Carolina as agent of the Authority. The Fund was established to enable qualified parents to save funds to meet the costs of the postsecondary education expenses of eligible students. Anyone may contribute to the Fund. Because the Fund meets the qualifications of a qualified tuition program under Section 529 of the Internal Revenue Code, distributions from the Fund are excludable from taxable income to the extent the distributions are used to pay for qualified higher education expenses.35 Interest earned on the Fund is also tax exempt. Currently every state offers a state Section 529 plan, and twenty-five states allow for a full or partial income tax deduction for contributions to the state's own plan.
The Parental Savings Trust Fund deduction allowed by Section 24.12 of this act must be added back to taxable income if the amount withdrawn from the Fund was not used to pay
31 Senate Bill 1552, 2006 Regular Session of the 2005 General Assembly.
32 A New York court found that a provision, which required married nonresidents to file a joint nonresident tax return in New York if they filed a joint federal return, was unconstitutional. The court explained that the provision exposed a nonresident spouse with no New York connections to civil and criminal liability in New York by virtue of that spouse's signature on the State tax return.
33 The deduction from taxable income is allowed for taxpayers with adjusted gross income below the following amounts: $60,000 for a single taxpayer, $100,000 for married, filing jointly, $80,000 for head of household, or $50,000 for married, filing separately.
34 Section 27 of S.L. 2006-198.
35 Qualified higher education expenses are: (1) tuition fees, books, supplies, equipment required for the enrollment or attendance of a beneficiary at an eligible educational institution, and expenses for special needs services; and (2) room and board costs.
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for qualified higher education expenses of the designated beneficiary. An exception is made if the withdrawal was made due to the death or permanent disability of the beneficiary.
The Parental Savings Trust Fund deduction is estimated to reduce General Fund revenues by $1 million in fiscal year 2006-2007, and $1.6 million in fiscal year 2007-2008.
Sales Tax on Railroad Cars
Section 24.13(a) of the act provides that when a lease or rental agreement requires periodic payments for a railway car that is leased by a utility company and the railway car would be considered transportation equipment if it were in interstate commerce, the periodic payments are sourced according to the following general sourcing principles set out in G.S. 105-164.4B(a) for sales tax purposes:
• When a purchaser receives the product at the business location of the seller, the sale is sourced to that business location.
• When the product is delivered to an address specified by the purchaser, the sale is sourced to the location where the purchaser received the product.
• When the delivery address is unknown, the sale is sourced to the first address or location listed below that is known to the seller:
o The business or home address of the purchaser.
o The billing address of the purchaser.
o The address from which tangible personal property was shipped.
Section 24.13.(a) became effective July 1, 2006, and applies to lease or rental payments made on or after that date.
Section 24.13.(b) of the act provides utility companies with the same refund for a portion of sales and uses taxes paid on purchases of railway cars and accessories that is currently available to interstate carriers for those same

2006 Finance Law Changes
S Corp Income Tax Adjustments.
Session Law
Bill #
Sponsor
S.L. 2006-17
HB 1898
Representative Wilkins
AN ACT TO MAKE CORPORATE INCOME TAX ADJUSTMENTS INAPPLICABLE TO S CORPORATIONS.
OVERVIEW: This act, which was a recommendation of the Revenue Laws Study Committee, provides that an individual's pro rata share of income from an S Corporation is subject only to individual income tax adjustments, rather than being subject to both individual and corporate income tax adjustments. The act also preserves an addition to federal taxable income for a shareholder's share of the built-in gains tax paid by an S Corporation at the federal level for purposes of determining State taxable income, since North Carolina does not assess a built-in gains tax.
FISCAL IMPACT: Minimal impact.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: This act is effective for taxable years beginning on or after January 1, 2006.
ANALYSIS: The act provides that an individual's pro rata share of income from an S Corporation is subject only to individual income tax adjustments, rather than being subject to both individual and corporate income tax adjustments. Prior to this act, an individual's pro rata share of S Corporation income attributable to North Carolina was subject to corporate income tax adjustments, while S Corporation income not attributable to North Carolina was subject to individual income tax adjustments. This change, which was recommended to the Revenue Laws Study Committee by the Department of Revenue, will provide consistency in the tax treatment of S Corporations since S Corporation income flows through to its shareholders who are required to be individuals or trusts and who are taxed at the individual level as opposed to the corporate level. The change also simplifies tax form preparation. Section 3 of the act, however, preserves an addition to federal taxable income for a shareholder's share of the built-in gains tax paid by the corporation at the federal level for purposes of determining State taxable income. This add-back to federal taxable income is required under current law.
The 'built-in gains tax' in Section 1374 of the Internal Revenue Code imposes a corporate-level tax on S Corporations that dispose of assets that appreciated in value during the years when the corporation was a C Corporation. The built-in gains tax applies only to assets that are disposed of within 10 years of the date on which S Corporation status is chosen. The shareholders of the S Corporation are also taxed on the gains. To provide some measure of relief from double taxation, each shareholder's share of income from the S Corporation is reduced by the shareholder's proportionate share of the built-in gains tax paid 1
by the S Corporation.1 The built-in gains tax is designed to prevent corporations that have unrecognized gain on assets during the years the corporation is a C Corporation from converting to S status and then distributing the assets tax free.
North Carolina does not assess a built-in gains tax. Therefore, there is no double taxation at the State level and no reason to allow the deduction for the shareholder's share of the built-in gains tax. Under existing law, there is a corporate income tax provision requiring an add-back for the built-in gains tax deduction. Since this act subjects S Corporations to individual income tax adjustments only, the act modifies existing law to require an S Corporation shareholder to add to taxable income the amount by which the shareholder's share of the S Corporation's income was reduced for federal purposes by the amount of the built-in gains tax imposed on the S Corporation.
An S Corporation is a corporation that has elected to have the corporation's income pass through to the shareholders. Thus, the business profits are taxed at individual tax rates. An S Corporation election allows the shareholders to preserve the benefit of limited liability for the corporate form while at the same time being treated as partners for federal income tax purposes. The S Corporation itself does not pay any income tax, but an S Corporation is required to file an informational return with the IRS, similar to a partnership tax return, to inform the IRS of each shareholder's ownership interest in the S Corporation. To be eligible for S Corporation status, a corporation must meet all of the following requirements:
• The corporation may have no more than 75 shareholders.
• The corporation may have only one class of stock, although different voting rights among shareholders are allowed.
• All shareholders must be individuals or trusts.
• The corporation must be formed in the United States.
• No shareholder may be a non-resident alien.
• The corporation may not be an insurance company or a domestic international sales corporation.
A C Corporation, on the other hand, assumes a separate legal and tax life distinct from its shareholders. It pays taxes at its own corporate income tax rates and files its own corporate tax forms each year. C Corporations may choose to retain their profits and earnings as part of their operating capital, or they may choose to distribute some or all of their profits and earnings as dividends paid to shareholders. Dividends paid to shareholders are essentially taxed twice, once at the corporate level and again at the individual level.
As previously noted, C Corporations cannot be shareholders of an S Corporation. All S Corporation shareholders must be individuals or trusts and are taxed at the individual income tax rates.
1 IRC Section 1366(f)(2).
2
IRC Update.
Session Law
Bill #
Sponsor
S.L. 2006-18
HB 1892
Rep. Wainwright; Luebke; Carney; Wilkins; (Primary Sponsors)
AN ACT TO UPDATE THE REFERENCE TO THE INTERNAL REVENUE CODE USED IN DEFINING AND DETERMINING CERTAIN STATE TAX PROVISIONS AND TO MAKE OTHER CHANGES TO MORE CLOSELY CONFORM TO FEDERAL TAX LAW.
OVERVIEW: This act, which was a recommendation of the Revenue Laws Study Committee, does the following:
• Updates the reference to the Internal Revenue Code used in defining and determining certain State tax provisions.
• Shortens the time span which a taxpayer has to file an amended estate, income, or gift tax return when the federal government corrects or otherwise determines the amount on which the tax is based.
• Conforms the filing date for income tax returns for a nonresident alien to the federal dates.
• Conforms the amounts for the credit for child care and certain employment-related expenses to the amounts allowed for the corresponding federal credits.
FISCAL IMPACT: Annual revenue loss is estimated to be $5.1 million in 2006-07 and 2007-08.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATES: The update to the reference to the Internal Revenue Code became effective when signed into law by the Governor on June 21, 2006. The part of the act concerning federal determinations became effective July 1, 2006, and applies to federal determinations made on or after that date. The parts of the act conforming the filing date for tax returns for nonresident aliens and the credit amounts for child care are effective for taxable years beginning on or after January 1, 2006.
ANALYSIS: The act makes the following changes to the revenue laws.
Federal Determinations
This act reduced the period of time in which a taxpayer must report a federal change from two years to six months. When the federal government corrects or otherwise determines the amount of an estate, gift, or income that is subject to tax, the taxpayer must file a State return that reflects that change. This is so because the State estate, gift, and income taxes are,
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to varying degrees, based on amounts determined with respect to federal law. The Multistate Tax Commission has adopted a model uniform statute for reporting federal changes. That model uniform statute requires a taxpayer to report those changes within six months. The model statute is intended to bring uniformity to this area among the states. Currently there is a great deal of variety with some states requiring changes to be reported in as little as 90 days to as much as two years. This provision became effective July 1, 2006, and applies to federal determinations made on or after that date.
Filing Period for Nonresident Aliens
Section 6072(c) of the Code requires a nonresident alien to file an income tax return on or before the fifteenth day of the sixth month following the close of the taxable year (June 15th for taxpayer whose taxable year is the calendar year). Under previous State law, nonresident alien corporate taxpayers were required to file a State return by the fifteenth day of the third month following the close of the taxable year (March 15th for a calendar year taxpayer) and nonresident alien individual taxpayers were required to file a State return by the fifteenth day of the fourth month following the close of the taxable year (April 15th for a calendar year taxpayer). Thus, under previous State law a nonresident alien was required to file a State income tax return before the federal tax return was due. This provision conforms the State filing deadlines to the federal filing deadlines for nonresident aliens and eases compliance burdens on those taxpayers. These provisions are effective for taxable years beginning on or after January 1, 2006.
Credit for Child-Care and Certain Employment-Related Expenses
Previous State law allowed a credit to a taxpayer who was eligible for the federal credit for child-care and employment-related expenses. The amount of the credit is based on a percentage of those expenses up to a certain amount. For the State credit, the amount of expenses that were taken into consideration when computing the credit were capped at $2,400 when there was one qualifying individual in the household and $4,800 when there was more than one qualifying individual in the household. Until 2003, these limits were the same as those at the federal level. In 2003, the federal limits increased to $3,000 and $6,000 respectively. This provision conforms the State limits to the federal limits. This provision also clarifies that the amount of expenses used in calculating the credit may not include any amount excluded from gross income. This provision is effective for taxable years beginning on or after January 1, 2006.
Updated References to Internal Revenue Code
North Carolina's tax law tracks many provisions of the federal Internal Revenue Code by reference to the Code.2 The General Assembly determines each year whether to update its reference to the Internal Revenue Code.3 Updating the Internal Revenue Code reference
2 North Carolina first began referencing the Internal Revenue Code in 1967, the year it changed its taxation of corporate income to a percentage of federal taxable income.
3 The North Carolina Constitution imposes an obstacle to a statute that automatically adopts any changes in federal tax law. Article V, Section 2(1) of the Constitution provides in pertinent part that the “power of taxation … shall never be surrendered, suspended, or contracted away.” Relying on this provision, the North Carolina court decisions on delegation of legislative power to administrative agencies, and an analysis of the few federal cases on this issue, the Attorney General’s Office concluded in a memorandum issued in 1977 to the Director of the Tax Research Division of the Department of Revenue that a “statute which adopts by
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makes recent amendments to the Code applicable to the State to the extent that State law tracks federal law. The General Assembly's decision whether to conform to federal changes is based on the fiscal, practical, and policy implications of the federal changes and is normally enacted in the following year, rather than in the same year the federal changes are made. This act changes the reference date from January 1, 2005, to January 1, 2006.
Between January 1, 2005, and January 1, 2006, there were four major pieces of federal legislation that made changes to the Internal Revenue Code. This federal legislation includes the Energy Tax Incentive Act of 2005 (P.L. 109-58) signed into law on August 8, 2005, the Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005 (P.L. 109-59) signed into law on August 10, 2005, the Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73) signed into law on September 23, 2005, and the Gulf Opportunity Zone Act of 2005 (P.L. 109-135) signed into law on December 21, 2005.
• Energy Tax Incentive Act of 2005 (P.L. 109-58) (hereinafter Energy Act): Many of the changes made in this act involve tax credits for various activities. Because they are tax credits, these provisions do not have a direct impact at the State level. There are, however, several provisions that could have an impact at the State level, most of which involve the depreciation, amortization, or expensing of certain items.
o Elimination of deduction for clean-fuel vehicles. Under previous law, a taxpayer was allowed a deduction for the purchase of a qualified clean-fuel vehicle. A 'qualified clean-fuel vehicle' is any motor vehicle that may be propelled by a clean-burning fuel such as natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, electricity, or any other fuel at least 85% of which is methanol, ethanol, or other alcohol or ether. The maximum amount of the deduction varied depending on the type of vehicle purchased. The deduction began to be phased out in 2004, and was set to be eliminated after the 2006 taxable year. This act moves up the phase-out so that the deduction is eliminated after the 2005 taxable year. In place of the deduction, this act creates a new federal credit for alternative fuel motor vehicles.
o Tax deferral for gains on electric transmission assets. Under previous law, a taxpayer could elect to recognize qualified gain from a qualifying electric transmission transaction over an eight-year period. In order for a transaction to be a 'qualifying electric transmission transaction', numerous conditions had to be satisfied, one of which was that the transaction must have been completed before January 1, 2007. This act extends that date by one year to January 1, 2008.
o Deduction for nuclear decommissioning costs. Utilities that own or operate a nuclear power plant are required by law to decommission the plant at the end of its useful life. A utility may elect to deduct contributions it makes to a nuclear decommissioning reserve fund established to help pay the costs associated with the eventual decommissioning. For previous tax years, contributions to such a reserve fund were limited to the lesser of the amount of nuclear
reference future amendments to the Internal Revenue Code would … be invalidated as an unconstitutional delegation of legislative power.”
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decommission costs allocable to the fund that is included in the taxpayer's cost of services for ratemaking purposes for the taxable year and the ruling amount. The 'ruling amount' is a schedule obtained from the IRS that specifies the annual payments that must be made into the fund to cover the amount of the decommission costs allocable to the fund over its existence. This act eliminates the 'lesser of' test for taxable years beginning on or after January 1, 2006, and instead limits the deduction to the ruling amount.
o Energy efficient commercial buildings property deduction. Despite the fact that large commercial buildings use approximately one-fourth of the electrical energy consumed in the nation, there was previously no federal tax incentive to encourage the use of energy-efficient property in the construction or renovation of commercial buildings. This act allows taxpayers to claim a deduction (as opposed to depreciation or amortization) with respect to costs associated with energy-efficient commercial building property placed into service between January 1, 2006, and January 1, 2008. The maximum amount that may be deducted is $1.80 per square foot of the building, less any amount deducted under this provision with respect to the same building in previous tax years. In order to qualify for the deduction, the following conditions must be satisfied: 1) the costs must be associated with depreciable or amortizable property that is installed in a commercial building that meets certain standards for energy efficiency; 2) the property is installed as part of the interior lighting, heating, cooling, ventilation, or hot water systems or the building envelope; and 3) the property is installed as part of a plan to reduce the total annual energy costs of the building with respect to the interior lighting, heating, cooling, ventilation, and hot water systems by at least 50% as compared to a similar building that meets certain minimum standards for energy efficiency. The IRS is required to issue regulations relating to eligibility for a partial deduction and to the transfer of a deduction from a public entity (like the State) to the person responsible for designing the property.
o Recapture of section 197 amortization. Generally, property subject to amortization under section 197 of the Code is intangible property that is purchased and held by a taxpayer in the course of a business. Section 197 property includes goodwill, covenants not to compete, patents, copyrights, trademarks and certain licenses. The cost of section 197 property is recoverable over fifteen years using straight-line depreciation. Under general rules, gain on the sale of depreciable property must be recaptured as ordinary income to the extent of depreciation deductions previously claimed. Under general rules, the recapture amount is computed separately for each piece of property. This act provides that if multiple pieces of section 197 property are sold or disposed of in a single transaction or series of transactions, then the taxpayer must compute the recapture as if all of the property were a single asset. The effect of this change is to maximize the amount of income treated as recapture, and thus as ordinary income, and to lessen the amount treated as a capital gain, which is taxed at a lower rate.
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o Depreciation of electric transmission property. Generally, under the modified accelerated cost recovery system (MACRS), assets used in the transmission and distribution of electricity for sale have a 20-year recovery period. This act allows the costs of certain electric transmission property placed into service after April 11, 2005, to be recovered over 15 years instead of 20.
o Expensing liquid fuel refineries. Under previous law, petroleum refining assets were depreciated over a 10-year recovery period using the double declining balance method. Petroleum refining assets are assets used for distillation, fractionation, and catalytic cracking of crude petroleum into gasoline and other petroleum products. This acts allows a taxpayer to make an election to expense 50% of the cost of qualified refinery property in the year in which the property is placed into service. 'Qualified refinery property' includes any portion of a qualified refinery that satisfies the following conditions: 1) The original use of the property commences with the taxpayer; 2) The property is placed in service between August 8, 2005, and January 1, 2012; 3) The property satisfies certain production capacity requirements; 4) The property satisfies all applicable environmental laws in effect when it is placed into service; 5) No written binding contract for the construction of the property was in effect on or before June 14, 2005; and 6) The construction of the property is subject to a written binding contract entered into before January 1, 2008. A 'qualified refinery' is one that is located in the United States and that is designed to serve the primary purpose of processing liquid fuel from crude oil or qualified fuels (including shale and tar sands and coal seams). The expensing election is not available with respect to a refinery that is used primarily as a topping plant, asphalt plant, lube oil facility, crude or product terminal, or blending facility.
o Depreciation of natural gas distribution lines. Under previous law, natural gas distribution lines installed by a gas company were depreciated over a 20-year period. This act allows natural gas depreciation lines placed in service between April 11, 2005, and January 1, 2011, to be depreciated over a 15-year period.
o Depreciation of natural gas gathering pipelines. Prior to the enactment of this act, there was a disagreement among the courts as to what asset class natural gas gathering pipelines owned by a nonproducer belonged. The IRS maintained, and this position was supported by the Tax Court, that these pipelines belonged to an asset class subject to depreciation over 15 years. The Courts of Appeals in the Sixth, Eighth, and Tenth Circuits, however, held that these pipelines belonged to an asset class subject to depreciation over seven years. There was agreement that natural gas gathering pipelines owned by a producer were part of the asset class subject to depreciation over seven years. This act clarifies that all natural gas gathering pipelines, regardless of ownership, are subject to depreciation over seven years. This provision applies to natural gas gathering pipelines placed in service after April 11, 2005.
o Geological and geophysical costs amortized over two years. Geological and geophysical costs are those incurred for the purpose of accumulating data that serves as 7
the basis for the decision about acquisition or retention of mineral rights by taxpayers in the business of exploring for minerals (including gas and oil). Courts have held these costs to be capital in nature and allocable to the property acquired or retained. If no property was acquired or retained, the costs were treated as a capital loss. This act provides that these costs, when incurred in the United States for oil or gas exploration, shall be amortized ratably over a 24-month period beginning on the mid-point of the taxable year in which the costs were incurred. The act does not affect the treatment of costs incurred outside of the United States or with respect to exploration for minerals other than oil or gas.
o 84-month amortization of air pollution control facilities. Previous law allowed taxpayers to amortize over a 60-month period a certified pollution control facility used in connection with a plant that was in operation before January 1, 1976. For certified pollution control facilities placed in service after April 11, 2005, this act eliminates the requirement that the property be used in connection with a plant that was in operation before 1976 if the plant is an electric generation plant that is primarily coal fired. For property that satisfies this criteria, the amortization period is 84 months. The act does not lengthen the amortization period for property that was covered by previous law, it provides a favored, though not as generously favored, method of depreciation for another class of property.
• Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005 (P.L. 109-59) (hereinafter SAFE Act): Although this act makes numerous tax changes at the federal level, these changes have little to no direct impact at the State level.
• Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73) (hereinafter Katrina Act): 2005 was a record-setting year on the meteorological front. Not only did the year see a record number of named storms (27) and a record number of hurricanes (14), the year also included the costliest Atlantic hurricane on record and one of the deadliest, Hurricane Katrina. Hurricane Katrina made landfall along the Gulf Coast on August 29, 2005, as a Category 3 storm. Hurricane Katrina resulted in the deaths of more than 1,400 people and caused over $80 billion in property damage. In the aftermath of Hurricane Katrina, Congress took action to assist taxpayers in the affected region. On September 21, 2005, Congress passed the Katrina Emergency Tax Relief Act of 2005, which was signed into law by President Bush on September 23, 2005. The act is a collection of tax relief provisions for individuals and businesses. Below, the key provisions of this act that could have an impact on State revenues are summarized.
o General Provisions. The act contains definitions of several key phrases that are used throughout the act. Under the act, 'Hurricane Katrina disaster area' means an area with respect to which a major disaster has been declared by the President before September 14, 2005, with respect to Hurricane Katrina. The states of Alabama, Florida, Louisiana, and Mississippi comprise the Hurricane Katrina disaster area. The act also defines the term 'core disaster area.' The core disaster area is a subset of the Hurricane Katrina disaster area that has been determined by the President to warrant individual or individual 8
and public assistance from the federal government. The core disaster area covers certain counties and parishes in Alabama, Louisiana, and Mississippi.
o Retirement Funds. The act contains a number of special rules related to retirement funds for people who lived in the Hurricane Katrina disaster area or the core disaster area. Generally, these provisions allow for a more liberal use of retirement funds for emergency needs than would otherwise be allowed without subjecting the taxpayer to some sort of penalty or disincentive. These provisions include the following:
􀂾􋹔 Tax favored withdrawals from retirement plans for relief relating to Hurricane Katrina. Generally, a withdrawal from a qualified retirement plan, a tax-sheltered annuity, an IRA, or an eligible deferred compensation plan maintained by a state or local government is included in taxable income in the year in which it is made. In addition, a distribution that is received before death, disability, or the age of 59 ½ is generally subject to a 10% early withdrawal tax. Some distributions are known as eligible rollover distributions and are not included in taxable income or subject to the 10% penalty tax. These distributions must be rolled over into another qualified retirement account within 60 days. This act provides an exception to the 10% early withdrawal tax in the case of a qualified Hurricane Katrina distribution4 from a qualified retirement plan, tax-sheltered annuity, or IRA. In addition, any amount required to be included in income as a result of a qualified Hurricane Katrina distribution is included in income in installments over the three-year period beginning with the year in which the distribution is made rather than entirely within the year that the distribution is made. Finally, any amount of a qualified Hurricane Katrina distribution that is recontributed to an eligible retirement account within the three-year period is treated as a roll-over distribution and is not included in income.
􀂾􋹒 Recontribution of withdrawals for home purchases cancelled due to Hurricane Katrina. There is an exception to the 10% early withdrawal tax discussed above in the case of a qualified first-time homebuyer distribution from an eligible retirement account. A qualified first-time homebuyer distribution is one that does not exceed $10,000 and that is used within 120 days of the distribution for the purchase or construction of a principal residence of a first-time homebuyer. If the distribution is not used for the purchase of the home within 120 days or is not rolled over into an eligible retirement account within 60 days, the distribution is included in income and is subject to the 10% early withdrawal tax. This act allows a taxpayer who received a qualified distribution from a retirement account to recontribute that amount to an eligible retirement account without penalty. For the purposes of this provision, a 'qualified distribution' is a
4 A 'qualified Hurricane Katrina distribution' is a distribution made from an eligible retirement plan on or after August 25, 2005, and before January 1, 2007, to an individual whose primary place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss due to Hurricane Katrina. The total amount of qualified Hurricane Katrina distributions to a taxpayer from all accounts may not exceed $100,000.
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distribution that was received after February 28, 2005, and before August 29, 2005, and that was to be used to purchase or construct a principal residence in the Hurricane Katrina disaster area, but the residence is not purchased or constructed because of Hurricane Katrina. Any portion of a qualified distribution may be contributed to an eligible retirement account and treated as a roll-over if it is recontributed between August 25, 2005, and February 28, 2006. Because it is treated as a roll-over, that portion will not be included in income or subject to the 10% early withdrawal tax.
􀂾􋹌 Loans from qualified plans for relief relating to Hurricane Katrina. An individual is allowed to borrow from a qualified employer plan in which the individual participates provided the loan satisfies certain conditions. Generally, a loan from a qualified employer plan is treated as a taxable distribution of plan benefits. A loan is not treated as a tax distribution of benefits to the extent that the loan, when added to the outstanding balance of all other loans to the individual from all plans maintained by the employer, does not exceed the lesser of 1) $50,000 reduced by the excess of the highest outstanding balance of loans from such plans during the one-year period ending on the day before the date the loan is made over the outstanding balance of loans from the plan on the date the loan is made or 2) the greater of $10,000 or one half the individual's accrued benefit under the plan. For this exception to apply, the loan must have a repayment period of five years or less, must be amortized in level payments, and must have payments due at least quarterly. This act provides special rules in the case of a loan from a qualified plan to a qualified individual. For the purposes of this provision, a 'qualified individual' is one whose principal place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss because of Hurricane Katrina. Under this provision, the loan limit discussed above is increased to the lesser of 1) $100,000 reduced by the excess of the highest outstanding balance of loans from such plans during the one-year period ending on the day before the date the loan is made over the outstanding balance of loans from the plan on the date the loan is made or 2) the greater of $10,000 or the individual's accrued benefit under the plan. In addition, this act provides that in the case of a qualified individual with an outstanding loan from a qualified plan on or after August 25, 2005, if the due date for any repayment with respect to the loan occurs during the period from August 25, 2005, to December 31, 2006, the due date is delayed for one year.
o Charitable Giving Incentives. In the wake of Hurricane Katrina, people from around the nation rushed to the aid of people in the affected areas with unprecedented amounts of charitable giving. As part of this act, Congress further encouraged and rewarded charitable giving.
􀂾􋹔 Temporary suspension of limitations on charitable contributions. In general, the income tax deduction allowed for charitable contributions is subject to limitations based on the type of taxpayer, the property contributed, and 10
the donee organization. Subject to certain limitations, discussed further below, the following general rules apply: 1) Contributions of cash are deductible in the amount contributed; 2) Contributions of capital gain property5 to a qualified charity are deductible at fair market value; 3) Contributions of other appreciated property are deductible at the donor's basis in the property; and 4) Contributions of depreciated property are deductible at the fair market value of the property. Most contributions are subject to percentage limitations. For individuals, the amount deductible is limited to a percentage of the taxpayer's contribution base6 The percentage varies depending on the type of donee organization and the type of property contributed. Contributions by an individual of property other than appreciated capital gain property to a charitable organization described in section 170(b)(1)(A) of the Code (public charities, private foundations other than private non-operating foundations, and certain governmental units) are deductible up to 50% of the contribution base. Contributions of this type of property to nonoperating private foundations and certain other organizations are deductible up to 30% of the contribution base. Contributions of appreciated capital gain property to an organization described in section 170(b)(1)(A) of the Code are generally deductible up to 30% of the contribution base. A taxpayer may elect to bring all of these contributions of appreciated capital gain property under the 50% limitation by reducing the amount of the deduction by the amount of the appreciation of the property. Contributions of appreciated capital gains property to a private nonoperating foundation are deductible up to 20% of the contribution base. For corporations, charitable contributions are deductible up to 10% of the corporations taxable income computed without regard to net operating loss or capital loss carrybacks. For both individuals and corporations, excess charitable contributions may be carried forward for up to five years. There is also an overall limitation on most itemized deductions for individuals. The total amount of otherwise allowable itemized deductions is reduced by three percent of the amount of the taxpayer's adjusted gross income in excess of a certain threshold. However, the otherwise allowed deductions may not be reduced by more than 80%. This reduction is reduced to two percent for the 2006 and 2007 taxable years and to one percent for the 2008 and 2009 taxable years, is repealed for the 2010 taxable year, and is reinstated for the 2011 taxable year. This act provides several exceptions to the limitations on charitable contribution deductions. For individuals, the deduction for qualified contributions is allowed up to the amount by which the taxpayer's contribution base exceeds the taxpayer's deductions for other charitable contributions. In most cases, this means that an individual may
5 'Capital gain property' means any capital asset or property used in the taxpayer's trade or business the sale which at its fair market value, at the time of contribution, would have resulted in a gain that would have been a long-term capital gain.
6 The 'contribution base' is the taxpayer's adjusted gross income computed without regard to any net operating loss carryback.
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deduct charitable contributions up to 100% of the taxpayer's adjusted gross income computed without regard to any net operating loss carryback. For corporations, the deduction for a qualified contribution is allowed up to the amount by which the corporation's taxable income exceeds the deduction for other charitable contributions. For the purposes of these provisions, a 'qualified contribution' is a cash contribution that is made between August 28, 2005, and December 31, 2005, to an organization described in section 170(b)(1)(A) of the Code. The term does not include a contribution of noncash property or one that is for the establishment or maintenance of a segregated fund or account with respect to which the donor reasonably expects to have advisory privileges with respect to the fund or account because of his status as donor. In the case of a corporation, the contribution must be for relief efforts related to Hurricane Katrina in order to be a qualified contribution. In addition, for individuals the charitable deduction contribution, up to the amount of qualified contributions, is not treated as an itemized deduction and is not subject to the reduction for higher-income taxpayers.
􀂾􋹁 Additional exemption for housing Hurricane Katrina displaced individuals. In the aftermath of Hurricane Katrina, hundreds of thousands of residents of the affected areas were displaced. During this time of displacement, many individuals opened their homes to those who had been displaced. Generally, individuals are allowed personal exemptions in computing taxable income. Personal exemptions are allowed for the taxpayer, the taxpayer's spouse, and the taxpayer's dependents. Personal exemptions are phased out for higher-income taxpayers. This act allowed a taxpayer an additional $500 exemption for each Hurricane Katrina displaced individual of the taxpayer, up to a maximum additional exemption of $2,000. The additional exemption is not subject to the phase out for higher-income taxpayers. For the purposes of this provision, a 'Hurricane Katrina displaced individual' is a person 1) whose principal place of abode on August 28, 2005, was in the Hurricane Katrina disaster area, 2) who was displaced from the abode, 3) who is provided housing free of charge in the taxpayer's principal place of residence for a period of 60 consecutive days that ends in the taxable year in which the exemption is claimed, and 4) who is not the spouse or dependent of the taxpayer. For a person whose principal place of abode on August 28, 2005, was outside of the core disaster area, the person's abode must have been damaged by Hurricane Katrina or the person must have been evacuated from the abode by reason of Hurricane Katrina.
􀂾􋹉 Increase in standard mileage rate for charitable use of vehicles. In determining the amount of the charitable contribution deduction when a taxpayer operates a vehicle in providing donated services to a charity, the taxpayer may either deduct actual operating expenditures or use the charitable standard mileage rate. The charitable standard mileage rate, 14 cents per
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mile, is significantly less than the business standard mileage rate7 The charitable rate is less than the business rate because it is meant to offset direct operating expenses only, such as gas, and not other expenses, such as a depreciation, insurance, or general maintenance. This act allows a taxpayer who uses a vehicle in providing donated service to charity for Hurricane Katrina relief only to compute the charitable mileage deduction at a rate equal to 70% of the business standard mileage rate, rounded to the next highest cent, on the date of the contribution. In the alternative, the taxpayer may continue to use actual operating expenditures to determine the amount of the deduction.
􀂾􋹍 Mileage reimbursement to charitable volunteers excluded from gross income. Volunteer drivers who are reimbursed for mileage expenses have taxable income to the extent that the reimbursement exceeds deductible expenses computed using either direct expenses or the charitable standard mileage rate. Under this act, reimbursement for mileage expenses by a charitable organization described in section 170(c) of the Code to a volunteer for the costs of using a passenger vehicle for Hurricane Katrina relief only is not included in income to the extent that the reimbursement does not exceed the amount that would be allowed using the business standard mileage rate. A taxpayer may not claim a deduction or credit for amounts excluded under this provision.
􀂾􋹃 Charitable deduction for contribution of food inventories. A taxpayer's deduction for charitable contributions of inventory is generally limited to the lesser of the taxpayer's basis in the inventory (usually cost) or the fair market value of the inventory. For certain contributions of inventory, a C corporation may claim an enhanced deduction equal to the lesser of 1) basis plus one-half of the item's appreciation or 2) two times basis. To be eligible for the enhanced deduction, the contributed property must generally be inventory of the corporation, contributed to a charitable organization described in section 501(c)(3) of the Code, and the donee must 1) use the property consistent with the donee's exempt purpose only for the care of the ill, the needy, or infants, 2) not transfer the property in exchange for money, other property, or services, and 3) provide the taxpayer with a written statement attesting to the proper use of the property. This act allows the enhanced deduction to any taxpayer engaged in a trade or business that makes a donation of food inventory. For taxpayers other than C corporations, the total deduction for contributions of food inventory may not exceed 10% of the taxpayer's income from all business entities from which a contribution of food inventory is made. The enhanced deduction is available only for food that qualifies as 'apparently wholesome food,' – food intended for human consumption that meets all quality and labeling standards imposed by
7 For expenses incurred between January 1, 2005, and September 1, 2005, the standard business mileage rate was 40.5 cents per mile. For expenses incurred between September 1, 2005, and January 1, 2006, the standard business mileage rate was 48.5 cents per mile.
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federal, state, and local laws even though the food may not be readily marketable for any number of reasons.
􀂾􋹃 Charitable deduction for contribution of book inventories. As with contributions of food inventories above, this act extends the enhanced deduction for C corporations to qualified book contributions. A 'qualified book contribution' is a charitable contribution of books to a public school that provides elementary education or secondary education, that is an educational organization that normally maintains a regular faculty and curriculum, and that normally has a regularly enrolled body of pupils in attendance at the place where its education activities are regularly conducted.
o Miscellaneous Provisions.
􀂾􋹅 Exclusion for certain cancellations of indebtedness by reason of Hurricane Katrina. Gross income includes income that is realized by a debtor for the discharge of indebtedness, subject to certain exceptions. This act provides that the gross income of a qualified individual does not include any amount which would otherwise by includible in gross income by reason of a discharge of nonbusiness debt if the indebtedness is discharged by an applicable entity. The relief allowed under this provision does not apply to any indebtedness to the extent that real property outside of the Hurricane Katrina disaster area serves as security for the debts. For the purposes of this provision, a 'qualified individual' is any natural person whose principal place of abode on August 25, 2005, was located 1) in the core disaster area or 2) in the Hurricane Katrina disaster area and the person suffered economic loss as a result of Hurricane Katrina. An 'applicable entity' includes the following: a financial institution; a credit union; a corporation that is a direct or indirect subsidiary of a financial institution or credit union and as such is subject to regulation by federal or state agencies; the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the National Credit Union Administration, and certain other federal executive agencies; an executive, judicial, or legislative agency; and any other organization for whom the lending of money is a significant trade or business.
􀂾􋹓 Suspension of certain limitations on personal casualty losses. A taxpayer may generally claim a deduction for any loss sustained during the taxable year for which he is not compensated by insurance or otherwise. For individuals, the loss must be incurred in a trade or business or consist of property loss attributable to casualty or theft. Losses are deductible only if they exceed $100 per casualty or theft and total casualty and theft losses exceed 10% of the taxpayer's adjusted gross income. This act removes the $100 and 10% limitations on casualty and theft losses to the extent those losses are in the Hurricane Katrina disaster area on or after August 25, 2005, and are attributable to Hurricane Katrina.
􀂾􋹒 Required exercise of IRS administrative authority. In general, the Secretary of the Treasury may grant reasonable extensions of time to taxpayers to
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perform certain acts. In addition, for certain military personnel, the time period for performing certain acts (such as filing returns, paying taxes, bringing suit) is automatically suspended. In the case of a Presidentially declared disaster or terroristic or military action, the Secretary has the authority to prescribe a period of up to one year in which the time period for the same actions is suspended. This act requires the Secretary to suspend those time periods at least until February 28, 2006, for taxpayers determined to have been affected by the Presidentially declared disaster relating to Hurricane Katrina. In addition, this act adds employment and excise taxes to the list of taxes for which the Secretary may extend filing and payment time periods.
􀂾􋹓 Special rules for mortgage revenue bonds. A qualified mortgage bond is a type of private activity bond for which interest is excluded from gross income. Qualified mortgage bonds are issued to make mortgage loans to qualified mortgagors for the purchase, improvement, or rehabilitation of owner-occupied residences and to finance qualified home improvement loans. There are several limitations on qualified mortgage bonds, including income limitations for homebuyers, purchase price limitations, and the requirement that the mortgagor be a 'first-time homebuyer' ��� one that did not have any ownership interest in a primary residence for the previous three years. The first-time home buyer requirement does not apply to targeted area residences – one that is located in an area of chronic economic distress or a census tract in which at least 70% of the families have an income that is 80% or less of the statewide median income. A qualified home improvement loan may not exceed $15,000. This act eliminates the first-time homebuyer requirement with respect to qualified Hurricane Katrina recovery residences. A 'qualified Hurricane Katrina recovery residence' is one that is financed before January 1, 2008, and is either 1) located in the core disaster area or 2) the mortgagor of which owned a principal residence in the Hurricane Katrina disaster area that was rendered uninhabitable by Hurricane Katrina and the residence financed is in the same state as the previous residence. The act also increases the maximum amount of a qualified home improvement loan to $150,000 for residences located in the Hurricane Katrina disaster area to the extent that the loan is for repair of damage caused by Hurricane Katrina.
􀂾􋹅 Extension of replacement period for nonrecognition of gain. A taxpayer generally realizes gain to the extent the sales price of property exceeds the taxpayer's basis in the property. The realized gain is subject to taxation unless it is deferred or not recognized under some special provision. Gain realized by a taxpayer from an involuntary conversion of property is deferred to the extent the taxpayer replaces the property within the applicable period. The applicable period begins when property is converted and ends two years after the close of the first taxable year in which the gain is realized. This act extends the applicable period from two years to five years for property that is located within the Hurricane Katrina disaster area that is compulsorily or involuntarily converted after 15
August 25, 2005, by reason of Hurricane Katrina. Substantially all of the use of the replacement property must be in this area for this provision to apply.
􀂾􋹓 Secretarial authority to make adjustments regarding taxpayer and dependency status for taxpayers affected by Hurricane Katrina. This provision allows the Secretary of the Treasury to make adjustments to the tax laws to ensure that taxpayers do not lose eligibility for credits or deductions or experience a change in filing status due to temporary relocations caused by Hurricane Katrina. An example of such an adjustment would be allowing a parent to claim a personal exemption for a child even if the child did not satisfy the residency requirement as a result of a relocation due to Hurricane Katrina. Any adjustment must ensure that an individual is not taken into account by more than one taxpayer with respect to the same benefit.
• Gulf Opportunity Zone Act of 2005 (P.L. 109-135) (GO Act): The Gulf Opportunity Zone Act of 2005 expanded upon the relief offered in the Katrina Emergency Tax Relief Act of 2005. In some instances, this expansion meant extending the additional benefits allowed under the Katrina Act to taxpayers affected by Hurricanes Rita or Wilma. In other cases, the expansion created new tax benefits for taxpayers in one or more of the disaster areas. The act also made numerous technical corrections.
o General Provisions. First, the GO Zone Act added several new definitions. First, the 'Gulf Opportunity Zone' or 'GO Zone' is a subset of the Hurricane Katrina disaster area that has been determined by the President to warrant individual or individual and public assistance from the federal government and is the same as the 'core disaster area' under the Katrina Act. The 'Hurricane Rita disaster area' means an area with respect to which the President has declared a major disaster before October 6, 2005, with respect to Hurricane Rita. The 'Hurricane Wilma disaster area' means an area with respect to which the President has declared a major disaster before November 14, 2005, with respect to Hurricane Wilma. The 'Rita GO Zone' and 'Wilma GO Zone' are, respectively, the portions of the Hurricane Rita disaster area and Hurricane Wilma disaster area that have been determined by the President to warrant individual or individual and public assistance from the federal government.
o Extensions of Hurricane Katrina benefits. The GO Zone Act extended some of the benefits of the Katrina Act to areas affected by Hurricanes Rita and Wilma. The following changes fall into this category.
􀂾􋹒 Retirement plans. The specific provisions discussed under the Katrina Act were repealed and replaced with more general provisions relating to all of the hurricanes. The provisions under this act were substantively identical to those discussed under the Katrina Act with some timing differences related to the different dates of the three storms.
􀂾􋹃 Casualty losses. The specific provisions discussed under the Katrina Act were repealed and replaced with more general provisions relating to all of the hurricanes. The provisions under this act were substantively identical 16
to that discussed under the Katrina Act with some timing differences related to the different dates of the three storms.
􀂾􋹓 Secretarial authority to make adjustments. The specific provisions discussed under the Katrina Act were repealed and replaced with more general provisions relating to all of the hurricanes. The provisions under this act were substantively identical to those discussed under the Katrina Act with some timing differences related to the different dates of the three storms.
􀂾􋹍 Mortgage revenue bonds. The first-time homebuyer requirement is eliminated for residences in the Rita GO Zone or the Wilma GO Zone. In addition, the increased maximum amount of a qualified home improvement loan is applied to residences in the Rita GO Zone and the Wilma GO Zone.
o Housing relief for Hurricane Katrina. As discussed above, the Katrina Act provided some relief to individuals who provided housing for Hurricane Katrina evacuees. In this act, Congress provided further tax relief relating to housing expenditures. Employer-provided housing is generally included in income as a form of compensation. An exception to this general rule exists when an employee is required to accept the lodging on business premises as a condition of employment. This act provides that a qualified employee's gross income does not include the value of any in-kind lodging furnished to the employee, the employee's spouse, or the employee's dependents by or on behalf of the qualified employer. The exclusion applies only to lodging furnished during the six-month period beginning January 1, 2006, and may not exceed $600 for any month in which lodging is furnished. For the purposes of this provision, a 'qualified employee' is an individual who on August 28, 2005, had a principal residence in the GO Zone and who performs substantially all of his or her employment services in the GO Zone for a qualified employer. For the purposes of this provision, a 'qualified employer' is an employer with a trade or business located in the GO Zone.
o Depreciation and expensing.
􀂾􋹂 Bonus depreciation for Gulf Opportunity Zone property. In 2002 and 2003, Congress acted to allow for bonus depreciation (either 30% or 50% depending on when the property was purchased) for property that was purchased after September 10, 2001. In order to qualify for the bonus depreciation, the property had to have been placed into service before January 1, 2005. For certain transportation property, noncommercial aircraft, or property with a long production period, the property must have been placed into service before January 1, 2006. This act allows a taxpayer to claim an additional first-year depreciation allowance equal to 50% of the adjusted basis of qualified Gulf Opportunity Zone property acquired on or after August 25, 2005, and placed into service before January 1, 2008 (the sunset date is January 1, 2009, for nonresidential real property and residential rental property). 'Qualified Gulf Opportunity Zone' property must satisfy all of the following conditions: 1) It must be depreciable modified accelerated cost recovery systems (MACRS)
17
recovery property with a recovery period of 20 years or less, MACRS water utility property, qualified leasehold improvement property, off-the-shelf computer software, residential rental property, or nonresidential real property; 2) Substantially all use of the property must be in the active conduct of a trade or business of the taxpayer in the GO Zone; 3) The original use of the property in the GO Zone must commence with the taxpayer on or after August 25, 2005; 4) The property must be purchased on or after August 25, 2005; 5) No written binding contract for the purchase of the property may be in effect before August 25, 2005; and 6) The property must be placed in service before January 1, 2008 (January 1, 2009 for nonresidential real property and residential rental property). The term does not include property that is 1) mandatory alternative depreciation system (ADS) property; 2) tax-exempt bond-financed property; 3) qualified revitalization buildings or rehabilitation expenditures for which a deduction under section 1400I of the Code is claimed; or 4) property used in connection with a private or commercial golf course, a country club, a massage parlor, a hot tub facility, a suntan facility, a liquor store, or a gambling or animal racing property. In addition, this act allows the Secretary to extend the placed-in-service date for noncommercial aircraft and property with longer production periods for up to one year. This extension is granted on a case-by-case basis and may only be granted if the delay in placing the property into service was caused by one of the three hurricanes and the property is placed in service in the GO Zone, the Rita GO Zone, or the Wilma GO Zone.
􀂾􋹉 Increase in limits on section 179 deductions. Certain taxpayers may elect to claim a section 179 expense deduction on the cost of qualifying property rather than depreciating the property over time. For the 2003 through 2007 tax years, the maximum amount of the deduction is limited to $100,000, indexed for inflation.8 This limitation is increased by $35,000 for property that is placed in service in the New York Liberty Zone, an empowerment zone, or a renewal community. The amount of the section 179 deduction is reduced to the extent that the total amount of property placed into service exceeds an investment threshold, currently set at $400,000, indexed for inflation.9 The section 179 deduction may not exceed a taxpayer's taxable income from the active conduct of a trade or business. This act increases the maximum section 179 deduction for qualified GO Zone property by the lesser of $100,000 or the amount of property placed into service in the GO Zone. In addition it increases the total investment limitation by the lesser of $600,000 or the amount of property placed into service in the GO Zone. The increased amounts apply to property acquired on or after August 25, 2005, and placed into service before January 1, 2008. 'Qualified GO Zone property' must satisfy all of the following conditions: 1) It must be depreciable modified
8 The adjusted dollar limitation is $105,000 for 2005 and $108,000 for 2006.
9 The adjusted investment limitation is $420,000 for 2005 and $430,000 for 2006.
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accelerated cost recovery systems (MACRS) recovery property with a recovery period of 20 years or less; 2) Substantially all use of the property must be in the active conduct of a trade or business of the taxpayer in the GO Zone; 3) The original use of the property in the GO Zone must commence with the taxpayer on or after August 25, 2005; 4) The property must be purchased on or after August 25, 2005; 5) No written binding contract for the purchase of the property may be in effect before August 25, 2005; and 6) The property must be placed in service before January 1, 2008. The term does not include property used in connection with a private or commercial golf course, a country club, a massage parlor, a hot tub facility, a suntan facility, a liquor store, or a gambling or animal racing property.
􀂾􋹄 Deduction for demolition and clean-up costs. Under general law, demolition costs are capitalized and added to the basis of the land on which the demolished building was located. The tax treatment of debris removal costs depends on the nature of the costs incurred. Debris removal costs that are in the nature of replacement must be capitalized and added to the basis of the property damaged. Other times, debris removal costs may be used to show a decrease in the fair market value of property which could be used to determine the amount of a casualty loss. This act allows a taxpayer to claim a current deduction for 50% of any qualified Gulf Opportunity Zone clean-up costs paid between August 25, 2005, and January 1, 2008. For the purposes of this provision, a 'qualified Gulf Opportunity Zone clean-up cost' is an amount paid for the removal of debris, or the demolition of structures, on real property located in the GO Zone if the real property is either held by the taxpayer for use in a trade or business or is inventory in the hands of the taxpayer.
􀂾􋹅 Environmental remediation costs. Under previous law, a taxpayer may elect to deduct, rather than capitalize, certain environmental remediation expenditures incurred in connection with property used in a trade or business for the production of income. This provision expired for expenditures incurred after December 31, 2005. This act extends the expiration date for that provision until December 31, 2007, for qualified environmental remediation expenditures incurred in connection with a qualified site in the GO Zone. In addition, expenditures incurred on or after August 25, 2005, with respect to petroleum products in the GO Zone are included in the deduction.
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Amend Taxation of Logging Machinery.
Session Law
Bill #
Sponsor
S.L. 2006-19
HB 1938
Rep. Wainwright; Church; McComas; Underhill; (Primary Sponsors)
AN ACT TO TREAT COMMERCIAL LOGGING MACHINERY THE SAME AS FARM MACHINERY UNDER THE SALES TAX.
OVERVIEW: This act, which was a recommendation of the Revenue Laws Study Committee, exempts from the 1% privilege tax, with an $80 maximum tax per article, commercial logging machinery, attachments, repair parts for commercial logging machinery, lubricants applied to commercial logging machinery, and fuel to operate commercial logging machinery for use in commercial logging operations.
FISCAL IMPACT: Annual revenue loss is estimated to be $2.87 million.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: This act became effective when signed into law by the Governor on June 21, 2006, and applies to purchases made on or after July 1, 2006.
ANALYSIS: For years, State tax law has provided that the sales and use tax rate on mill machinery is 1%, with an $80 maximum tax per article. There has never been a specific reference in the sales tax statutes to machinery used in the forestry and logging business; however, based on a long-standing interpretation by the Department of Revenue, logging firms that had contracts with wood product manufacturers to cut timber were deemed entitled to the 1% rate, $80 cap based on the preferential rate afforded to manufacturing industries and plants.
For several years, North Carolina has worked toward simplifying its sales and use tax statutes in an effort to conform to the Streamlined Sales and Use Tax Agreement. One of the conforming changes the State had to make was to simplify its sales tax rates. Under the Streamlined Sales and Use Tax Agreement, a state must have one rate, with no caps or thresholds, as of January 2006.
Prior to January 1, 2006, North Carolina had several different rates, including this 1% rate with an $80 cap. To conform to the Streamlined Sales and Use Tax Agreement, the General Assembly changed how the State taxes items previously taxed at the 1% sales tax rate with an $80 cap:
• In 2001, at the request of North Carolina Citizens for Business and Industry, the General Assembly maintained the preferential tax rate on mill machinery by removing it from the sales tax statutes to the privilege tax statutes. By changing the nature of the tax from a sales tax to a privilege tax, the industry kept its preferential rate and the State conformed to the Streamlined Sales and Use Tax Agreement. The change from a sales tax to a privilege tax means that retailers are not responsible for collecting and remitting the tax. The change in the law, made in 2001, became effective January 1, 2006. Based upon the long-standing
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interpretation by the Department, this change encompassed machinery used in the forestry and logging business.
• In 2005, the General Assembly exempted from tax sales to farmers of machinery, attachments and repair parts for the machinery, and lubricants applied to the machinery. It also expanded the 1% privilege tax with an $80 cap, originally enacted in 2001, to include manufacturing fuel and major recycling equipment.
Thus, as of January 1, 2006, purchases of mill machinery, which includes commercial logging equipment, and mill machinery parts or accessories and manufacturing fuel, became exempt from sales and use tax, but were subject to the new privilege tax. The privilege tax is imposed on the purchaser of qualifying property, and the purchaser is liable for accruing and remitting the tax to the Department of Revenue. Examples of qualifying commercial logging equipment include log skidders, log carts, tree shears, feller bunchers, winches, chain saws, tractors, axes, and mallets when the items are used to cut and transport timber to a wood products manufacturer.
This act treats commercial logging machinery and related items the same as farm machinery under the current sales tax laws. First, the act exempts commercial logging items from the 1%/$80 maximum privilege tax, to which they are currently subject. The act also creates a new exemption in the sales and use tax statutes for commercial logging machinery, attachments and repair parts, lubricants, and fuel used to operate commercial logging machinery. The language of the exemption tracks the current exemption for farm machinery, as enacted in S.L. 2005-276.
Property Tax Changes.
Session Law
Bill #
Sponsor
S.L. 2006-30
HB 2097
Representative Brubaker
AN ACT TO MAKE CLARIFYING CHANGES TO THE PROPERTY TAX LAWS.
OVERVIEW: This act, which was a recommendation of the Revenue Laws Study Committee, makes the following changes to the property tax laws:
• It allows the electronic listing of individual as well as business personal property.
• It clarifies that 60% of only the first month's interest collected on delinquent registered motor vehicle taxes is transferred to the Combined Motor Vehicle and Registration Account, not the total interest collected on the unpaid taxes.
• It gives a county board of equalization and review the authority to approve late applications for present use-value appraisal of property.
• It validates the current practice of allowing tax collectors to receive tax receipts for assessments that have been or are subsequently appealed to the Property Tax Commission and to send the taxpayer an initial bill for those taxes.
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FISCAL IMPACT: This act does not impact State revenues and does not have a significant impact on local revenues.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: The act became effective when signed into law by the Governor on June 26, 2006.
ANALYSIS: This act makes several changes to the property tax statutes.
Electronic Listing
The General Assembly enacted legislation in 2001 to allow counties to adopt a resolution providing for the electronic listing of business personal property.10 This act extends a county's authority to provide electronic listing to include individual personal property11 as well as business personal property. If the county commissioners adopt such a resolution, then the assessor must include information on how to list electronically in the listing notice sent to taxpayers. An abstract submitted by electronic listing is considered filed when received in the office of the assessor.
This act does not extend the listing deadline for individual personal property. The listing period begins on January 1 and ends on January 31. A county may, for good cause, give an individual taxpayer an extension until April 15 to list personal property. Under current law, a county may extend the period for electronic listing of business personal property until June 1.
Clarifying Change
The act makes a clarifying change to legislation enacted during the 2005 Session. S.L. 2005-294 created a combined system for the registration and taxation of motor vehicles, effective July 1, 2009.12 Under the new combined system, consumers will receive one statement per registered vehicle containing all the registration fees and property taxes due on the vehicle. The Division of Motor Vehicles, or its agent, will be responsible for collecting the fees and taxes due.
To pay for the new system, the 2005 legislation increased the first month's interest on delinquent registered motor vehicle taxes from 2% to 5%, effective January 1, 2006, and required that 60% of the interest collected on unpaid taxes be transferred on a monthly basis to the Combined Motor Vehicle and Registration Account in the Treasurer's Office. Funds in this Account may only be transferred to the DMV for the purpose of implementing the combined system, at the direction of the North Carolina Association of County Commissioners. The intent of the sponsors of the 2005 legislation was that 60% of only the first month's interest would be transferred to the Account, not the total interest collected on unpaid taxes. This act clarifies this intent.13
10 S.L. 2001-279.
11 Examples of individual personal property include automobiles, boats, and mobile homes.
12 Section 31.5 of S.L. 2006-259 changed this effective date to July 1, 2010.
13 In December 2005, the North Carolina Department of State Treasurer issued a memorandum directing counties to only remit 60% of the first month's interest to the Treasurer. The memorandum stated that this was the true intent of the legislation and that it anticipated that language clarifying this intent would be enacted during the 2006 Session. The memorandum was sent to all county managers, finance officers, tax administrators, tax assessors, tax collectors, and certified public accountants.
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Late Application for Present Use-Value
The act gives a county board of equalization and review the authority to approve a late application for present use-value appraisal of property if the applicant demonstrates good cause for the delay.14 If the county board of equalization and review is not in session, then the late filing may be approved by the board of county commissioners. Existing law provides for similar approval for late applications for property tax exemptions or exclusions.15
Tax Receipts for Assessments
Each year the county board of commissioners or the municipal governing body directs the tax collector to collect taxes charged in the tax records and receipts. The tax receipt sets out the name and address of the taxpayer, the assessment of the taxpayer's property, the rate of tax levied, and the amount of property taxes and any penalties due. Prior law stated that no tax receipts could be delivered to the tax collector for any assessment appealed to the Property Tax Commission until the appeal had been finally adjudicated. In practice, boards of equalization and review often adjourn on June 30, except to hear appeals filed prior to June 30. The tax collector receives the tax receipts by August 1.
This act validates the current practice of allowing tax collectors to receive tax receipts for assessments that have been or are subsequently appealed to the Property Tax Commission, but clarifies that the tax collector may not seek any remedies for collection of the taxes or enforcement of the tax lien pending final adjudication of appeal from the assessment. The tax collector may, however, send an initial bill or notice to the taxpayer pending final adjudication. By providing notice pending appeal, the taxpayer may choose to avoid the amount of interest that accrues while the appeal is pending. If the taxpayer wins on appeal, the taxpayer receives a refund of any taxes paid plus interest. The current practice also puts a potential buyer of property on notice of a tax bill if the property is transferred pending the appeal.
The act also makes a conforming change in the law concerning the annual settlement the tax collector makes with the governing body of its taxing unit. A tax collector is liable for the faithful performance of his or her collection duties. Each year, a tax collector must make a sworn report to the governing body of the taxing unit showing what taxes remain unpaid at the end of the fiscal year. In this final settlement for the preceding fiscal year, a collector is charged with the total amount of taxes for collection, less any amounts that may be credited to the collector in the settlement. 16 This act adds to the list of items that may be credited to the collector the principal amount of taxes for any assessment appealed to the Property Tax Commission when the appeal has not been finally adjudicated.
14 Generally, an application for present-use value must be filed during the regular listing period: January 1 through January 31.
15 G.S. 105-282.1(a1).
16 Charges include the total amount of all taxes placed in the collector's hands for collection for the year, all late-listing penalties and costs collected by the collector, all interests on taxes collected by the collector, and any other sums collected or received by the tax collector. Credits include all sums deposited by the collector to the credit of the taxing unit, releases allowed by the governing body, discounts allowed for early payment of taxes, the principal amount of taxes constituting liens against real property, the principal amount of taxes determined to be insolvent and to be allowed as credits, and any commission the collector is entitled to deduct from amounts collected.
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SSTA Sales Tax Defn/Sales Tax Payments.
Session Law
Bill #
Sponsor
S.L. 2006-33
HB 1915
Representative Hill
AN ACT TO INCORPORATE THE STREAMLINED SALES TAX DEFINITIONS CONCERNING TELECOMMUNICATIONS, TO SIMPLIFY THE TAX PAYMENT REQUIREMENTS FOR SEMIMONTHLY TAXPAYERS, AND TO TREAT TANGIBLE PERSONAL PROPERTY USED IN MODULAR HOMES THE SAME AS TANGIBLE PERSONAL PROPERTY USED IN OTHER HOMES.
OVERVIEW: This act, which was a recommendation of the Revenue Laws Study Committee, does three things:
• Incorporates several definitions from the Streamlined Sales Tax Agreement into North Carolina law.
• Changes the tax payment requirements for semi-monthly sales tax payers.
• Allows a credit for sales tax paid on tangible personal property that is added to a modular home and sold with the modular home.
FISCAL IMPACT: The changes made with respect to definitions under the Streamlined Sales Tax Agreement have no fiscal impact on the State, but the changes with respect to sourcing of prepaid wireless may have a minimal impact on local governments. Minimal to no fiscal impact is expected from the changes regarding tax payment schedules.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: Different parts of the act have different effective dates as described below.
ANALYSIS: The act makes the following changes to the revenue laws.
Streamlined Sales Tax Agreement
Sections 1 through 8 of the act modify the definitions that apply to telecommunications services for sales and use tax purposes. The changes were made to adopt the definitions in the Streamlined Sales Tax Agreement (hereinafter Streamlined Agreement). These changes become effective January 1, 2007.
Section 1 of the act makes the following changes in G.S. 105-164.3, the definitions section of the sales and use tax laws:
• Adds a definition of the term 'ancillary service' because the definitions in the Streamlined Agreement separate ancillary services from telecommunications services. Previous North Carolina law considered ancillary services to be part of telecommunications services. All of the ancillary services were taxed under previous law and will continue to be taxed.
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• Modifies the definition of 'prepaid telephone calling service' to include the newly defined terms for 'prepaid wireless calling service' and 'prepaid wireline calling service'. Previous law did not distinguish between prepaid wireline and prepaid wireless. The definition of prepaid wireless was added to recognize that prepaid wireless includes whatever other services can be obtained with the same card used to obtain wireless telecommunications service. Prepaid cards are taxed at the point of sale rather than as telecommunications service when the minutes are used. Some services that are not within the definition of telecommunications service can be purchased with the card that authorizes prepaid wireless use. The current definition of prepaid telephone calling service has an exclusive use requirement that conflicts with the practice for prepaid wireless.
• Converts the current definition of prepaid telephone calling service into the definition of 'prepaid wireline calling service'. This change is technical.
• Adds a definition for 'prepaid wireless calling service'. This definition does not have an exclusive use requirement, in contrast to prepaid wireline.
• Updates the definition for 'Streamlined Agreement' to include the latest amendments made January 13, 2006.
• Conforms the definition of 'telecommunications service' to the Streamlined definition and incorporates into the definition the appropriate inclusions and exclusions that are now in G.S. 105-164.4C(b) and (c). As changed, the definition is the same as previous law with two exceptions. The first exception relates to Universal Service Fund surcharges. The second exception is related to paging service. With these changes, these charges are part of the sales price and will be subject to tax. Universal Service Fund surcharges could not be 'carved out' and remain as under previous law because there is no Streamlined carve out in sales price or telecommunications service for this surcharge. Paging service may be carved out because there is a Streamlined definition for this, but this act does not include that carve out.
Section 2 of this act changes the tax imposition statute to add the now separate category of 'ancillary service' and to include non-telecommunications services that are sold as part of a prepaid wireless calling service.
Section 3 of this act makes a conforming change to the sourcing statute to apply the new definition of prepaid wireless call service.
Section 4 of this act makes conforming changes to the separate statute on telecommunications to include ancillary service and to apply the new definition of prepaid wireless calling service.
Section 5 of this act moves to the exemption statute the items that were formerly excluded from the definition of telecommunications and are not intended to be taxed. This change maintains the current tax treatment of these services.
Sections 6 through 8 of this act add the now separate category of 'ancillary service' in the exemption statute, in the direct pay permit statute, and in the local distribution statute.
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Section 12 of this act repeals the requirement that a certified automated system must be able to determine whether an exemption certificate offered by a purchaser is a valid certificate based upon a State registry because the Streamlined Agreement does not require this determination. The section became effective June 1, 2006, because the first certification of an automated system under the Streamlined Sales Tax Act occurred around that date. Under the Streamlined Sales Tax Act, a seller may collect and remit the sales and use tax due a state through either a certified service provider or it may do it itself through the use of a certified automated system. A certified automated system is a software program certified by the Secretary of Revenue as being able to correctly determine the applicable State and local sales tax rate. G.S. 105-164.44H(a) lists the specific requirements a certified automated system must meet to be certified. This section removes one of the requirements because it is not a requirement under the Agreement.
Sales Tax on Modular Homes
Previous law stated that the retail sale of a modular home was the sale of the home to a modular homebuilder. It assumed that a manufacturer would sell to a modular homebuilder who would then enter into a performance contract with a customer to construct the home. This assumption was not accurate when the manufacturer sold the modular home directly to the customer who would occupy the home.
Section 13 of the act addresses two issues. First, it clarifies the law concerning a retail sale of a modular home by including within the scope of a retail sale all sales to the customer who will occupy the home. It does this by removing the previous limitation that defined a retail sale as a sale to a modular homebuilder. Second, it allows a credit for sales and use tax paid on materials used in the home. G.S. 105-164.6 allows a credit against this State's sales tax for any sales or use tax paid in another state on the same item. This provision does not apply, however, to taxes paid in another state on materials that are included in a modular home that is taxed when it is sold to a modular homebuilder because the taxes paid to the two states are on different items. This section allows credit for sales tax paid on the items that are included in the home.
This part of the act became effective July 1, 2006, and applies to purchases made on or after that date.
Simplify Semi-Monthly Tax Payments
Under previous law, taxpayers that were liable for at least $10,000 a month in sales tax, electric utility tax, or piped natural gas excise tax were required to pay tax twice a month. For these taxpayers, the month was split into two periods – the first day of the month through the 15th of the month, and the 16th of the month through the end of the month. The tax payment for the 1st through 15th period was due by the 25th of the same month and the tax payment for the 16th through the end of the month was due by the 10th day of the following month. Therefore, taxpayers had 10 days after the end of a semimonthly period to make a payment. In addition to the payments, these taxpayers also were required to file a return. The sales tax return was due monthly by the 20th and the electric utility and piped gas returns were, and remain, due quarterly by the end of the month after the close of the quarter.
Several large retailers in the Streamlined Sales Tax project asked North Carolina to look at its payment schedule to determine if it could require payments to be made only once a month. North Carolina is one of only a few states that require payments twice a month.
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Sections 9, 10, and 13 of the act replace the semimonthly payment schedule with a single monthly payment and a prepayment of the next month’s liability due on the same day as the monthly payment. The result is that taxpayers will have more time to gather data before filing a return and will make payments on only one day of the month. Under the act, the taxpayer makes one payment on the 20th of the month. That payment includes any amount remaining due for the preceding month and 65% of the amount estimated to be due for the current month. The State will experience a slight one-time increase in revenue in the first month that the prepayment schedule takes effect.
The prepayment must equal at least 65% of one of three thresholds:
• The current month’s liability.
• The liability for the same month the preceding year.
• The average monthly liability for the past calendar year.
These thresholds are easily determined and eliminate the need for the taxpayer to calculate actual liability for periods of less than a month. The 65% threshold was chosen because it was suggested by the retailers who requested North Carolina to review its law and the prepayment date is about 2/3 of the time in a month. A similar method and threshold are already in place in Florida and Arkansas.
The act eliminates the provisions concerning penalty relief for small underpayments because the relief is no longer needed. The relief was provided under previous law because the law required taxpayers to calculate liability for short periods within 10 days after the end of the period. Under this act, sales tax taxpayers have 20 days after the end of the month to file a return and electric utility and piped gas taxpayers have a full month after the end of a quarter to file a return.
This part of the act becomes effective October 1, 2007.
Mill Rehabilitation Tax Credit.
Session Law
Bill #
Sponsor
S.L. 2006-40
HB 474 As amended by S.L. 2006-25217
Rep. Ross, Howard, Brubaker, Goodwin
AN ACT TO PROVIDE A TAX CREDIT FOR REVITALIZATION OF HISTORIC MILL FACILITIES AND TO PROVIDE AN ENHANCED HISTORIC REHABILITATION CREDIT FOR REHABILITATION EXPENSES WITH RESPECT TO A FACILITY THAT WAS ONCE A STATE-OWNED TRAINING SCHOOL FOR JUVENILE OFFENDERS.
17 S.L. 2006-252 replaced the tax credits under the Bill Lee Act with more narrowly focused credits. The act replaced 'enterprise tiers' with 'development tiers' and reduced the number of tiers from five to three. S.L. 2006-252 made changes to this act to conform to the changes made in it.
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OVERVIEW: This act does three things:
• It provides an enhanced credit for rehabilitating a facility that at one time was a State-owned training school for juvenile offenders.
• It provides an income tax credit for rehabilitating vacant historic manufacturing sites if the taxpayer spends at least $3 million to rehabilitate the site. The credit is a percentage of the qualified rehabilitation expenditures or rehabilitation expenses. The percentage amount of the credit varies depending on the development tier location of the site and its eligibility for the federal credit.
• It eliminates the requirement that in order for a project to be eligible for a credit for rehabilitating non-income producing property it must receive the certification of the State Historic Preservation Officer before the commencement of work.
FISCAL IMPACT: The act is expected to decrease General Fund revenues $2.8 million in fiscal year 2006-07. This loss grows to an anticipated $14.7 million in fiscal year 2008-09 before beginning to decline. Preservation NC estimates there are approximately 30 to 35 mill properties out of more than 200 eligible properties throughout North Carolina likely to be rehabilitated as a result of this tax credit.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: The act is effective for taxable years beginning on or after January 1, 2006, and applies to eligible sites placed into service on or after July 1, 2006. The act expires for qualified rehabilitation expenditures and rehabilitation expenses incurred on or after January 1, 2011.
ANALYSIS: North Carolina has two income tax credits for rehabilitating an historic structure. One credit is allowed to taxpayers that qualify for the federal historic rehabilitation credit. The federal tax credit is available for rehabilitating only income-producing historic structures, and is equal to 20% of the rehabilitation expenses. The amount of the North Carolina credit is 20% of the expenses that qualify for the federal credit. The second credit is allowed to taxpayers that rehabilitate an historic structure that is not income producing, and thus not eligible for the federal credit. The credit is equal to 30% of the rehabilitation expenses. To qualify for the credit for rehabilitating a non-income producing historic structure, the taxpayer must spend more than $25,000 within a 24-month period. The North Carolina credit for both income-producing structures and non-income producing structures must be taken in installments over five years after the structure is placed in service, and any unused portion of the credit may be carried forward for five years. A pass-through entity may allocate the credit to an owner if an owner's adjusted basis in the pass-through entity is at least 40% of the amount allocated to that owner.
Enhanced Credit
The act amends the tax credit allowed for rehabilitating an historic structure by increasing the credit amount for rehabilitating a facility that was once a State-owned training school for juvenile offenders. The amount of credit such a facility may be eligible to receive is increased to 40% of the qualified rehabilitation expenditures or rehabilitation expenses rather than 20% or 30%, respectively. This provision allows for an enhanced credit for a rehabilitation
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of the facilities of the former Stonewall Jackson Manual Training and Industrial School in Cabarrus County.
Mill Rehabilitation Credit
The act also establishes an enhanced tax credit for rehabilitating vacant historic manufacturing sites. This credit may be taken in place of the existing credit for historic rehabilitation, not in addition to it. The tax credit enacted by this act for rehabilitating historic manufacturing sites differs from the tax credit for historic rehabilitation in several ways. The amount of the credit is larger, the credit may be taken against one of three taxes, in some instances the credit may be taken in the year the property is placed into service, and any unused portion of the credit may be carried forward for nine years.
To be eligible to claim the credit for rehabilitating a vacant historic manufacturing site, a taxpayer must spend at least $3 million to rehabilitate the site. To qualify for the credit, the site must satisfy all of the following conditions:
• The site was used as a manufacturing facility or for purposes ancillary to manufacturing, as a warehouse for selling agricultural products, or as a public or private utility.
• The site has been at least 80% vacant for a period of at least two years immediately preceding the date the eligibility certification is made.
• The site is a certified historic structure or a State-certified historic structure.
The amount of the credit depends upon the development tier in which the site is located and the eligibility of the site for a federal credit as follows:
• 40% of qualified rehabilitation expenditures or rehabilitation expenses – If the site is located in a development tier one or two, regardless of whether the taxpayer is allowed a federal credit.
• 30% of qualified rehabilitation expenditures – If the site is located in a development tier three and the taxpayer is allowed a federal credit.
• No credit is allowed if the site is located in a development tier three and the taxpayer is not allowed a federal credit.
If the credit is taken for income-producing property, it may be taken in the year the property is placed in service. If the credit is taken for non-income-producing property, the credit must be taken in five equal installments beginning with the taxable year in which the property is placed in service.
The credit allowed may be claimed against the income tax, the franchise tax, or the gross premium tax. The taxpayer must elect the tax against which the credit will be claimed, and this election is binding.
The credit may not exceed the amount of the tax against which the credit is claimed for the taxable year reduced by the sum of all credits allowed, except payment of tax made by the taxpayer. Any unused portion of the credit may be carried forward for nine years.
A pass-through entity may allocate the credit among any of its owners without limitation as long as the owner's adjusted basis in the pass-through entity is at least 40% of the amount of
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credit allocated to the owner.18 An owner of a pass–through entity that qualifies for the credit will forfeit a portion of any credit the owner has received if both of the following conditions are met:
• The owner disposed of the interest within five years from the date the eligible site is placed into service.
• The owner's interest in the pass-through entity is reduced to less than two-thirds of the owner's interest in the pass-through entity at the time the eligible site was placed into service.
The forfeiture of an owner's interest is not required if the change in ownership is the result of the owner's death or the merger, consolidation, or similar transaction requiring approval by the shareholders, partners, or members of the entity, to the extent the entity does not receive cash or tangible property in the transaction. A taxpayer or owner of a pass-through entity that forfeits a credit is liable for all past taxes avoided as a result of the credit plus interest computed from the date the taxes would have been due if the credit had not been allowed.
Certification by the State Historic Preservation Officer
To qualify for either the historic rehabilitation tax credit or the mill rehabilitation tax credit, the State Historic Preservation Officer must certify that the facility comprises an eligible site and that the rehabilitation is a certified rehabilitation. A taxpayer must provide the Secretary of Revenue with documents showing that the State Historic Preservation Officer certifies the site and rehabilitation and showing the amount of rehabilitation expenditures or expenses. Under prior law, the certification of the repairs or alterations had to be obtained by the taxpayer from the State Historic Preservation Officer prior to the commencement of the work. This act eliminates the timing of this requirement for both the credit enacted by this act and for the pre-existing credit for rehabilitating an historic structure.19
Modify Appropriations Act of 2005.
Session Law
Bill #
Sponsor
S.L. 2006-66
SB 1741
Senator Garrou
AN ACT TO MODIFY THE CURRENT OPERATIONS AND CAPITAL APPROPRIATIONS ACT OF 2005, TO INCREASE TEACHER AND STATE EMPLOYEE PAY, TO REDUCE THE SALES TAX RATE AND THE INCOME TAX RATE APPLICABLE TO MOST SMALL BUSINESSES, TO CAP THE VARIABLE WHOLESALE COMPONENT OF THE MOTOR FUEL TAX RATE AT ITS CURRENT RATE, TO ENACT OTHER TAX
18 A pass-through entity may also allocate the credit for rehabilitating an historic structure among its owners in the same manner as provided in this provision.
19 The taxpayer is still required to receive certification from the State Historic Preservation Officer that the repairs or alterations comply with federal standards, but the timing of that certification is immaterial.
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REDUCTIONS, AND TO PROVIDE FOR THE FINANCING OF HIGHER EDUCATION FACILITIES AND PSYCHIATRIC HOSPITALS AND OTHER CAPITAL PROJECTS.
OVERVIEW: This act is The Current Operations and Capital Improvements Appropriations Act of 2006. In addition to the budget provisions, the act makes many tax law changes and authorizes the issuance of special indebtedness to finance several capital projects across the State. The tax law changes made in this act include the following:
• It reduces the sales tax rate from 4.5% to 4.25%, effective December 1, 2006.
• It reduces the upper individual income tax bracket from 8.25% to 8%, effective for taxable years beginning on or after January 1, 2007, and from 8% to 7.75%, effective for taxable years beginning on or after January 1, 2008.
• It caps the variable wholesale component of the motor fuels tax rate for one year and holds the Highway Fund harmless for any potential revenue loss.
• It creates a new tax credit for small businesses that provide health benefits to their eligible employees, effective for taxable years beginning on or after January 1, 2007, and expiring for taxable years beginning on or after January 1, 2009.
• It extends the sunset for refunds of the State sales and use tax on fuel used by interstate passenger air carriers and on aviation fuel used by a motorsports racing team or a motorsports sanctioning body. The refunds were scheduled to expire for purchases made on or after January 1, 2007; the act extends the date of expiration to January 1, 2009.
• It extends the sunset on the tax credit for constructing renewable fuel production facilities from January 1, 2008, to January 1, 2011, and it creates an enhanced credit if the taxpayer invests at least $400 million in three separate facilities over a five-year period.
• It creates a tax credit for certain biodiesel providers, effective January 1, 2007, and expiring January 1, 2010.
• It exempts qualifying research and development equipment from State and local sales and use tax and imposes a 1% privilege tax with an $80 cap, effective July 1, 2007.
• It provides a sales and use tax refund for a professional motorsports racing team for purchases of professional motor racing vehicle component parts other than tires or accessories made by it, effective July 1, 2007.
• It provides a married couple with the option of filing jointly if they file a federal joint return and if one spouse is a nonresident with no income from North Carolina, effective for taxable years beginning on or after January 1, 2006.
• It allows an individual taxpayer to deduct a maximum amount of $750 contributed by the taxpayer to an account in the Parental Savings Trust Fund. A married couple filing jointly may deduct a maximum of $1,500. To qualify for the deduction, the adjusted gross income of the individual taxpayer or married 31
couple filing jointly must not exceed a specified amount. The deduction is effective for taxable years beginning on or after January 1, 2006. The deductible amount increases for taxable years beginning on or after July 1, 2007. The deduction is repealed for taxable years beginning on or after January 1, 2011.
• It provides an exemption from the sales and use tax on sales of tangible personal property and electricity to an eligible Internet data center, effective for sales made on or after October 1, 2006.
• It amends the definition of 'corporation', as it applies to the franchise tax statutes, to include a limited liability company (LLC) that elects to be taxed as a C Corporation for federal income tax purposes. The effect of this change is that the corporate franchise tax will apply to these LLCs. The change is effective for taxable years beginning on or after January 1, 2007.
• It expands the royalty payment reporting option for corporations and their related members to include payments received for use of patents and copyrights, effective for taxable years beginning on or after January 1, 2006.
FISCAL IMPACT: The tax changes enacted in this act reduce General Fund revenues by approximately $193.5 million for fiscal year 2006-2007. The act authorizes approximately $254 million in special indebtedness for the fiscal year 2006-2007, and another $419 million in the future.
(For a more complete fiscal analysis, see Overview: Fiscal and Budgetary Actions, 2006 Session. Available in the Legislative Library.)
EFFECTIVE DATE: The act contains varying effective dates.
ANALYSIS: The act makes the following finance law changes.
Transfer of Tax Proceeds from Highway Trust Fund to General Fund.
Each fiscal year, a certain sum of highway use tax proceeds is transferred from the Highway Trust Fund to the General Fund. The first amount is equal to $1.7 million. In 2005, the General Assembly altered that amount for fiscal years 2005-2006 and 2006-2007 by requiring a transfer of $250 million in each of those fiscal years. Section 2.2(e) of the act reduces the transfer amount to $55 million for fiscal year 2006-2007 only.
The second amount required to be transferred annually from the Highway Trust Fund to the General Fund is determined by a formula. The formula is determined by adjusting the amount distributed in the previous fiscal year, which began as a base of $2.4 million in fiscal year 2002-2003, plus or minus a percentage of this sum equal to the percentage by which tax collections have increased or decreased for the most recent 12-month period for which data is available. Using this formula, the second amount transferred to the General Fund for fiscal year 2006-2007 is $2,486,602.
Consultation Not Required Prior to Establishing or Increasing Fees pursuant to the Executive Budget Act
Section 6.3 of the act provides that an agency is not required to consult with the Joint Legislative Commission on Governmental Operations pursuant to G.S. 12-3.120 prior to
20 G.S. 12-3.1 provides that before an agency's rule to establish or increase a fee can become effective, the agency must consult with the Joint Legislative Commission on Governmental Operations on the amount and
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establishing or increasing a fee authorized or anticipated in the Current Operations and Capital Improvements Appropriations Act of 2006, or in the Senate and House of Representatives Appropriations Committee Reports on the Continuation, Expansion and Capital Budgets, that were distributed in the Appropriations and Base Budget Committees and used to explain this act. The statutory consultation requirement is unnecessary since the General Assembly already considered these fees in the Appropriation Act of 2006 and Committee Reports.
No Increases that the General Assembly has Rejected
Section 6.4 of the act amends the Executive Budget Act by adding a statute prohibiting a fee increase if the General Assembly has rejected an increase in that fee for the current fiscal period. For purposes of this section, the General Assembly has rejected a fee increase when that fee is included in a bill which fails a reading or is in a version of a bill that passes one house but is enacted without the fee increase.
Refund of Local Sales and Use Taxes to a Local School Administrative Unit
Prior to the 2006-2007 fiscal year, local school administrative units were eligible for an annual refund of sales and use taxes paid by the unit. In 2005, the General Assembly repealed the provision which authorized the refund for local school administrative units in an attempt to redirect estimated State sales tax revenues refundable to LEAs to the State Public School Fund for allotment through State position, dollar, and categorical allotments. However, the amount that was transferred to the State Public School Fund was sufficient to offset only the State portion of the taxes that were previously refunded. The effect of this was to reduce the amount going to the public schools. Section 7.20 of the act maintains the repeal of the refund of the State taxes, but allows local school administrative units to apply for a refund of the local sales and use taxes paid by the unit. As before, the refund applies to sales and use taxes paid on direct purchases of tangible personal property, other than telecommunications and electricity, and indirect purchases of building materials. Also as before, the request for a refund must be in writing and is due within six months after the end of the entity's fiscal year. This is the only instance in which a taxpayer is eligible for a refund of local sales and use taxes when the taxpayer is not also eligible for a refund of State sales and use taxes. This change is effective retroactive for purchases made on or after July 1, 2005.
Revised Maximums for Collection Assistance Fees
Section 19.2 of the act increases the maximum amount of collection assistance fee proceeds that the Department of Revenue may apply to taxpayer locator services from $100,000 to $150,000 per year and adds a yearly limit of $353,000 to the amount of the fees that may be applied towards postage or other delivery charges for correspondence related to collecting overdue tax debts. In 2001, the General Assembly established a system under which the cost of collecting overdue tax debts is to be borne by the delinquent taxpayers, not by the taxpayers who pay their taxes on time. The collection assistance fee is 20% of the overdue tax debt and is a receipt of the Department.21 The proceeds of the fee are credited to a
purpose of the fee to be established or increased. If the Commission does not hold a meeting to hear the consultation request within a specified time, then the consultation requirement is deemed satisfied.
21 Section 22.6 of S.L. 2005-276 amended the law to provide that the amount of the collection assistance fee would be the actual cost of collection, not to exceed 20% of the amount of the overdue tax debt. However,
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special, non-reverting account to be used only for collecting overdue tax debts. The Department of Revenue may apply the fee proceeds for the following purposes:
• To pay contractors for collecting tax debts.
• To pay the fee charged by the federal government for collecting tax debts by offset.
• To pay for taxpayer locator services. Section 19.2 increases the dollar amount that may be used to pay for these services from a maximum of $100,000 a year to a maximum of $150,000 a year.
• To pay for postage or other delivery charges for correspondence relating to collecting overdue tax debts. Section 19.2 sets a dollar limit of $353,000 a year on the amount that may be used to pay for postage and delivery charges.
• To pay operating expenses for Project Collection Tax and the Taxpayer Assistance Call Center.
• To pay the expenses of the Examination and Collection Division related to collecting overdue tax debts.
Consolidate Tax Project Reports
Section 19.3 of the act moves the statutory requirement that the Department of Revenue report on its efforts to collect tax debts and on its use of the proceeds of the collection assistance fee from G.S. 105-243.1 to G.S. 105-256. G.S. 105-256(a) contains a list of the reports the Department must provide. This section adds the report of its collection efforts to this list.
Special Indebtedness Projects
Section 23.12 of the act authorizes the issuance of special indebtedness to finance the capital facility costs, including construction or renovation, of the following projects and in the following amounts:
• North Carolina Museum of Art - $40 million.
• Central Regional Psychiatric Hospital for the Department of Health and Human Services - $20 million.
• A new Secondary State Data Center - $24,841,300.
• A new Center City Classroom Building at the University of North Carolina-Charlotte - $45,827,400.
• The Department of Health and Human Services Public Health Laboratory and Office of Chief Medical Examiner - $101 million.
• The Eastern Regional Psychiatric Hospital for the Department of Health and Human Services - $145 million. The indebtedness must be incurred over a period
Section 37 of S.L. 2005-345 subsequently repealed this section, leaving the amount of the collection assistance fee at 20% of the amount of the overdue debt.
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of time: no more than $20 million may be incurred prior to July 1, 2007; and no more than $100 million may be incurred prior to July 1, 2008.
• The Regional Medical Center and Mental Health Center of the Department of Correction - $132,200,000. The indebtedness must be incurred over a period of time: no more than $8.2 million may be incurred prior to July 1, 2007; no more than $58.2 million may be incurred prior to July 1, 2008; and no more than $98.2 million may be incurred prior to July 1, 2009.
• The Western Regional Psychiatric Hospital for the Department of Health and Human Services - $162.8 million. However, no indebtedness may be incurred prior to July 1, 2008.
Reduce Sales Tax Rate Early
Section 24.1 of the act provides for an earlier reduction of the State sales tax rate from 4.5% to 4.25%, effective December 1, 2006. Prior to October 16, 2001, the general rate of State sales tax was 4%. Effective October 16, 2001, the general rate was raised to 4.5%. The general rate was set for reduction back to 4% on July 1, 2007. This section moved up the date of reduction of the State sales tax to 4.25% from July 1, 2007, to December 1, 2006. The remaining quarter-cent will expire as scheduled on July 1, 2007. The cost of the early sales tax reduction is estimated at $140.1 million for 2006-07.
Reduce Income Tax Rate Applicable to Most Small Businesses Early
Section 24.2 of the act provides for an earlier reduction in the upper-income individual tax bracket rate than provided under previous law. The rate will be reduced from 8.25% to 8%, effective for taxable years beginning on or after January 1, 2007.22 The rate will then be further reduced to 7.75% in 2008 as provided under previous law. In 2001, the General Assembly added a new tax bracket that imposed an additional one-half percent income tax (a total rate of 8.25%) on certain North Carolina taxable income for three years. In 2003 the General Assembly extended the rate to 200623 and in 2005 the General Assembly extended the rate until 2008.24 The change was estimated to affect approximately 2% of North Carolina taxpayers. The anticipated impact of this change on General Fund revenues is a one-time reduction of $28.6 million in non-recurring revenues in FY 2006-07.
Prior to 2001, tax was imposed at the following rates on individuals' North Carolina taxable income:
Tax Rate
Married filing jointly
Heads of household
Single filers
Married filing separately
6%
Up to $21,250
Up to $17,000
Up to $12,750
Up to $10,625
7%
Over $21,250 and up to $100,000
Over $17,000 and up to $80,000
Over $12,750 and up to $60,000
Over $10,625 and up to $50,000
7.75%
Over $100,000
Over $80,000
Over $60,000
Over $50,000
22 The Governor's budget recommended a phase down of the upper income tax rate to 8% in 2006 and the elimination of this bracket in 2007.
23 S.L. 2003-284, Section 39.1.
24 S.L. 2005-276, Section 36.1. 35
The 2001 law created a fourth tax bracket for North Carolina taxable income as follows:
Tax Rate
Married filing jointly
Heads of household
Single filers
Married filing separately
8.25%
Over $200,000
Over $160,000
Over $120,000
Over $100,000
Cap Variable Wholesale Component of Motor Fuels Tax Rate and Hold Highway Fund Harmless
A motor fuel excise tax is imposed on all motor fuel sold, distributed, or used in the State. The rate of tax consists of a flat rate of 17.5¢ per gallon plus a variable wholesale component equal to the greater of 7% of the average wholesale price of motor fuel during a base six-month base period or 3.5¢ per gallon. The variable wholesale rate for the period of January 1, 2006, through June 30, 2006 was 12.4¢ per gallon, and the total rate was 29.9¢ per gallon. One-half cent per gallon of the excise tax is allocated to various environmental funds. Of the remaining excise tax revenue, 75% goes to the Highway Fund and 25% goes to the Highway Trust Fund.
Section 24.3 of the act caps the variable wholesale component of the motor fuel excise tax rate at its current rate of 12.4¢ per gallon for the period of July 1, 2006, through June 30, 2007. In addition, Section 2.2(g) of the act provides a reserve in the General Fund for the purpose of holding harmless the Highway Fund and the Highway Trust Fund in the event that the variable wholesale component of the excise tax would have exceeded 12.4¢ per gallon, if it were not capped.25 If the calculated variable component of the motor fuel excise tax rate exceeds the cap, the State Treasurer is directed to transfer funds, on a monthly basis, from the reserve account to the Highway Fund and the Highway Trust Fund. The amount transferred is the difference between the amount of motor fuel excise tax revenue allocated to each of those funds for a month and the amount that would have been allocated to it if the variable wholesale component were not capped at 12.4¢ per gallon. The total amounts that may be transferred to the Highway Fund and the Highway Trust Fund are limited to $17.6 million and $5.7 million, respectively. Funds remaining in the Reserve for Motor Fuels Tax Ceiling on June 30, 2007 revert to the Savings Reserve Account within the General Fund on that date.
These two sections became effective July 1, 2006.
Small Business Health Insurance Tax Credit
Section 24.4 of the act creates a new tax credit for small businesses that provide health benefits to their eligible employees. A 'small business' is defined as a taxpayer that employs no more than 25 full-time employees. An 'eligible employee' is one that works a normal workweek of 30 or more hours. In order to be eligible for the credit, either (1) the business must pay at least 50% of the premiums for health insurance coverage that equals or exceeds the minimum provisions of the basic health care plan of coverage recommended by the Small Employer Carrier Committee, or (2) the employee has existing coverage under one or more of the following: Medicare; Medicaid; a government funded program; or a health insurance or benefit arrangement that provides benefits similar to or in excess of benefits provided under the basic health care plan.
25 The amount allocated to the environmental funds is not affected because that amount depends on the number of gallons sold.
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The credit amount is equal to $250 per employee whose total wages or salary received from the business does not exceed $40,000 annually, not to exceed the taxpayer's cost of providing the health insurance benefit. The taxpayer may use the credit against either its income tax or its franchise tax liability. The credit may not exceed 50% of the taxpayer's tax liability. Any unused portions of the credit may be carried forward for five years. The credit is effective for taxable years beginning on or after January 1, 2007, and it expires for taxable years beginning on or after January 1, 2009.
Under the Internal Revenue Code, an employer may deduct premiums paid for health insurance cost of its employees as a business expense. This credit would be in addition to any expense deduction the taxpayer claimed on its income tax return for health insurance costs.
Expand Definition of Development Zone
Section 24.5 of the act expands the definition of a development zone to include an economic development and training district. Location in a development zone leads to more favorable treatment for the taxpayer under the Bill Lee Act with respect to the wage standard, the credit for creating new jobs, the credit for investing in machinery and equipment, and the credit for worker training and could result in extending the availability of the credits if certain other criteria are met with respect to a project. The effective date of this change is retroactive for taxable years beginning on or after January 1, 2004.
The General Assembly provided for the creation of economic development and training districts in 2003.26 An economic development and training district may be created for the purpose of providing a skills training center to prepare county residents to perform manufacturing, research and development, and related service and support jobs in the pharmaceutical, biotech, life science, chemical, telecommunications, and electronics industries. A county may levy property taxes within a district, in addition to those levied throughout the county, in order to finance the skills training center. A municipality cannot annex property within a district. The 2003 legislation provided that if the Board of Commissioners of Johnston County elected to establish an economic development and training district, then the district as initially established would consist of certain described real property owned by Bayer Corporation, Novo Nordisk Pharmaceutical Industries, Inc., Fresenius Kabi Clayton, L.P., and the Johnston County Airport Authority. The Johnston County commissioners created such a district.
The companies expanding in that economic development and training district understood they would be eligible for the Bill Lee tax credits applicable to a development zone. In retrospect, the property included in the district did not meet the requirements of a development zone. This act expands the definition of a development zone to include this property.
Extend Sunsets on Sales and Use Tax Refunds for Aviation Fuel
Section 24.6 of the act extends the sunset for refunds of the State sales and use tax on fuel used by interstate passenger air carriers and on aviation fuel used by a professional motorsports racing team or a motorsports sanctioning body from January 1, 2007, to January 1, 2009. This section became effective when the Governor signed it into law on July 10,
26 S.L. 2003-418.
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2006. The extension of the sunset is expected to reduce General Fund revenues by $90,000 in fiscal year 2006-2007.
In 2005, the General Assembly added a new refund allowable to interstate passenger air carriers for the net amount of sales and use tax paid by them on fuel during a calendar year in excess of $2,500,000. That same year, the General Assembly enacted a refund for motorsports racing teams and motorsports sanctioning bodies of the sales and use tax paid by them on aviation fuel used to travel to/from a motorsports event in this State, to travel to a motorsports event in another state from a location in this State, or to travel to this State from a motorsports event in another state. Those refunds became effective on January 1, 2005, and applied to purchases made on or after that date; they were scheduled to expire for purchases made on or after January 1, 2007. Section 24.6 of the act extends the date of expiration to January 1, 2009.
Ethyl Alcohol Tax Credit
Although the title of this section refers to ethyl alcohol, the credit itself applies to either ethyl alcohol or biodiesel. In 2004, the General Assembly created a credit for constructing renewable fuel production facilities. The credit is equal to 25% of the costs of constructing the facility. The credit may be claimed against income tax or franchise tax, is limited to 50% of the amount of tax liability against which it is claimed, and has a carryforward period of five years. That credit was set to sunset for taxable years beginning on or after January 1, 2008.
Section 24.7 of the act does two things. First, it extends the sunset on the credit for constructing renewable fuel production facilities and a related credit for constructing a renewable fuel dispensing facility until 2011. Second, it creates an enhanced credit if the taxpayer invests at least $400 million in three separate facilities over a five-year period. As with the current credit, the enhanced credit cannot exceed 50% of the amount of tax liability. Unlike the current credit, the enhanced credit may be claimed only against the income tax, but has a carryforward period of 10 years. A taxpayer may not claim both credits with respect to the same facility.
Tax Credit for Biodiesel Producer
Section 24.8 of the act provides for a tax credit for certain biodiesel providers. In order to qualify for the credit, the provider must be a producer of biodiesel27 (as opposed to an importer) that produces at least 100,000 gallons of biodiesel during the taxable year. The amount of the credit is equal to the per gallon excise tax (currently 29.9 cents per gallon) paid by the producer on the biodiesel. The credit may be claimed against income tax or franchise tax, is limited to 50% of the amount of tax liability against which it is claimed, and has a carryforward period of five years. The credit is repealed for taxable years beginning on or after January 1, 2010.
Research and Development Sales Tax Changes
27 For the purposes of this provision, biodiesel is liquid fuel derived in whole from agricultural products, animal fats, or wastes of agricultural products or animal fats. This differs from the definition of biodiesel for motor fuels excise tax purposes in that for motor fuel excise tax purposes the fuel may be derived in part from one of those substances.
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Mill machinery is taxed at a 1% rate with an $80 cap per article.28 Research and development equipment is subject to the 7% State and local sales tax rate. Section 24.9 of this act, as amended by Section 12 of S.L. 2006-196, exempts research and development equipment from State and local sales and use tax and imposes a 1% privilege tax with an $80 cap, thus affording this type of equipment the same tax treatment as mill machinery. In order to qualify, the equipment must meet all of the following requirements:
• Purchased by a research and development company in the physical, engineering, and life sciences that is included in industry 54171 of NAICS.29
• Capitalized by the taxpayer for tax purposes under the Code.
• Used by the taxpayer in the research and development of tangible personal property.
• Would be considered mill machinery if it were purchased by a manufacturing industry and is used in the research and development of tangible personal property manufactured by the industry.
This section becomes effective July 1, 2007.
Sales and Use Tax Refund for Motorsports Racing Teams
Section 24.10 of the act provides a sales and use tax refund for a professional motorsports racing team for purchases of professional motor racing vehicle component parts other than tires or accessories. The amount of the refund is equal to 50% of the sales and use tax paid. This section becomes effective July 1, 2007, and applies to purchases made on or after that date. A professional motorsports racing team is a racing team (1) operated for profit (2) that obtains the majority of its revenue from sponsorship of the racing team and prize money and (3) that competes in at least 66% of the races per season sponsored by a motorsports sanctioning body. In 2005, the General Assembly enacted a refund for motorsports racing teams30 and motorsports sanctioning bodies of the sales and use tax paid by them on aviation fuel used to travel to or from a motorsports event in this State, to travel to a motorsports event in another state from a location in this State, or to travel to this State from a motorsports event in another state.
Joint Filing Options
Prior to this act, a married couple who filed a federal joint return was required to file a North Carolina joint return if each spouse was either a resident or had North Carolina income. If one spouse was a nonresident and had no North Carolina income, that spouse was not subject to North Carolina income tax and the other spouse was required to file a separate return. This requirement is based on the fact that North Carolina has no jurisdiction to tax a person who is not a resident and does not have income from North Carolina sources. However, this approach can be burdensome and complicated because the couple must recompute their income separately in order to file a North Carolina return.
28 Prior to January 1, 2006, mill machinery was subject to a 1% State sales tax with an $80 cap per article. Last session, to comply with the uniform rate requirements of the Streamlined Sales and Use Tax Agreement, the General Assembly exempted mill machinery from the sales tax and began imposing a 1% privilege tax with an $80 cap.
29 'NAICS' is the North American Industrial Classification System. It divides businesses into categories based on the primary activity that occurs at an establishment.
30 Section 24.6 of this act inserts the defined term 'professional motorsports racing team' in the refund provisions for aviation fuel.
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Section 24.11 of the act, which originated as a Revenue Laws recommendation31 provides a married couple with the option of filing jointly if they file a federal joint return and if one spouse is a nonresident with no income from North Carolina. Because North Carolina does not have jurisdiction over the nonresident spouse, the act permits, but does not require, a joint return.32 This option would also allow North Carolina residents to file jointly in Georgia and South Carolina. Currently, these two states do not allow nonresident joint filing for residents of states that do not allow joint filings for Georgia and South Carolina residents.
This provision is effective for taxable years beginning on or after January 1, 2006.
Parental Savings Trust Fund Tax Deduction
Section 24.12 of the act allows an individual taxpayer to deduct from the taxpayer's taxable income a maximum amount of $750 contributed by the taxpayer to an account in the Parental Savings Trust Fund. A married couple filing jointly may deduct a maximum of $1,500. To qualify for the deduction, the adjusted gross income of the individual taxpayer or married couple filing jointly must not exceed a specified amount.33 The deduction is effective for taxable years beginning on or after January 1, 2006, and is repealed for taxable years beginning on or after January 1, 2011. For taxable years beginning on or after January 1, 2007, the deduction for an individual taxpayer is increased to a maximum of $2,000 and the deduction for a married couple filing jointly is increased to a maximum of $4,000.34 The Parental Savings Trust Fund Tax deduction is repealed for taxable years beginning on or after January 1, 2011.
In 1996, the General Assembly established the Parental Savings Trust Fund. The Fund is maintained by the State Education Assistance Authority, a political subdivision of the State, and is administered by the College Foundation of North Carolina as agent of the Authority. The Fund was established to enable qualified parents to save funds to meet the costs of the postsecondary education expenses of eligible students. Anyone may contribute to the Fund. Because the Fund meets the qualifications of a qualified tuition program under Section 529 of the Internal Revenue Code, distributions from the Fund are excludable from taxable income to the extent the distributions are used to pay for qualified higher education expenses.35 Interest earned on the Fund is also tax exempt. Currently every state offers a state Section 529 plan, and twenty-five states allow for a full or partial income tax deduction for contributions to the state's own plan.
The Parental Savings Trust Fund deduction allowed by Section 24.12 of this act must be added back to taxable income if the amount withdrawn from the Fund was not used to pay
31 Senate Bill 1552, 2006 Regular Session of the 2005 General Assembly.
32 A New York court found that a provision, which required married nonresidents to file a joint nonresident tax return in New York if they filed a joint federal return, was unconstitutional. The court explained that the provision exposed a nonresident spouse with no New York connections to civil and criminal liability in New York by virtue of that spouse's signature on the State tax return.
33 The deduction from taxable income is allowed for taxpayers with adjusted gross income below the following amounts: $60,000 for a single taxpayer, $100,000 for married, filing jointly, $80,000 for head of household, or $50,000 for married, filing separately.
34 Section 27 of S.L. 2006-198.
35 Qualified higher education expenses are: (1) tuition fees, books, supplies, equipment required for the enrollment or attendance of a beneficiary at an eligible educational institution, and expenses for special needs services; and (2) room and board costs.
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for qualified higher education expenses of the designated beneficiary. An exception is made if the withdrawal was made due to the death or permanent disability of the beneficiary.
The Parental Savings Trust Fund deduction is estimated to reduce General Fund revenues by $1 million in fiscal year 2006-2007, and $1.6 million in fiscal year 2007-2008.
Sales Tax on Railroad Cars
Section 24.13(a) of the act provides that when a lease or rental agreement requires periodic payments for a railway car that is leased by a utility company and the railway car would be considered transportation equipment if it were in interstate commerce, the periodic payments are sourced according to the following general sourcing principles set out in G.S. 105-164.4B(a) for sales tax purposes:
• When a purchaser receives the product at the business location of the seller, the sale is sourced to that business location.
• When the product is delivered to an address specified by the purchaser, the sale is sourced to the location where the purchaser received the product.
• When the delivery address is unknown, the sale is sourced to the first address or location listed below that is known to the seller:
o The business or home address of the purchaser.
o The billing address of the purchaser.
o The address from which tangible personal property was shipped.
Section 24.13.(a) became effective July 1, 2006, and applies to lease or rental payments made on or after that date.
Section 24.13.(b) of the act provides utility companies with the same refund for a portion of sales and uses taxes paid on purchases of railway cars and accessories that is currently available to interstate carriers for those same